A Risk-Assessment Framework for Art-Secured Lending

Abstract

We identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. Also, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision-makers and risk managers, we introduce a number of risk-related metrics that provide a detailed characterization of the lending operation risk profile. We conclude that with the customary LTV ratios currently prevalent in the art-based lending business (around 50%), the lender’s exposure is quite bounded. Moreover, the advantages of having a diversified collateral, from a risk perspective, are relevant. Finally, we find that the uncertainty related to the value of the painting is much more important than the uncertainty related to either the credit risk profile of the borrower, or, the artists’ returns during the period the loan remains outstanding.