Collateral Value Research Articles

Damaged collateral and firm-level finance: Evidence from Russia’s war in Ukraine

How much has Russia’s war in Ukraine damaged the collateral of Ukrainian firms, and how much damage has that caused the Ukrainian financial system? We address this question using unusually rich high-frequency supervisory data of Ukrainian banks combined with a survey of banks on the location and condition of corporate borrowers’ collateral between February and November 2022. Exploiting plausibly exogenous variation in collateral value resulting from damage to collateral, we find that a 10-percent reduction in the collateral-loan ratio lowers the probability of getting any new loan by nearly eight percentage points; new lending falls by over two percentage points. Our results additionally imply that the same reduction in collateral value raises default rates and banks’ assessment of firms’ probability of default by approximately eight and four percentage points, respectively. The results imply that, in the absence of sufficient aid to repair the damage, Ukraine may experience reduced investment and lower economic growth in the future.

Статальность и пассивность причастий на -н/-т в русском языке

The question of participles on -n/-t, which in terms of the pledge category turn out to be marked members and in their morphological form constantly express a passive meaning, is considered. But the pledge in the Russian language is a morphological and syntactic category. It reflects the opposite both at the level of morphological forms and at the level of syntactic structures. From this position, the definition of collateral values is not scientifically justified only from the point of view of morphological features. The purpose of this article is to establish the differences between short forms of participles on -n/-t, which have a passive meaning, and short forms of participles on -n/-t, which have a static meaning. The materials of this article bring a certain theoretical significance to the category of the pledge of the Russian language.

Expectations and the housing market: A model of house price dynamics

AbstractWe examine the characteristics of housing markets under adaptive and heterogeneous expectations. Model agents have finite horizons, and their borrowings are constrained by the collateral value of housing stock. Our model shows that expectation‐driven housing price dynamics constantly change the direction of movement. The steady‐state process of housing prices follows an endogenous oscillation process, and the magnitude of the cycles can be amplified by external shocks. Our quantitative results imply that (i) short‐term positive and long‐term negative serial correlations in housing price changes are inherent, (ii) house prices and expected house price movements are positively correlated, and (iii) fluctuations in housing prices are not fully explained by fundamentals.

TSUKAMOTO FUZZY IN OPTIMIZING THE CREDITWORTHINESS ASSESSMENT PROCESS AT SAVINGS AND LOAN COOPERATIVES

Savings and Loan Cooperatives are ones of the non-bank institutions whose business activity is the provision of loan. In its business activities, problems often arise, namely non-performing loans which causes no turnover of funds which leads to losses. One of the causes of non-performing loans is the lack of objective creditworthiness assessment. The purpose of this study is to optimize the process of assessing the feasibility of loan applications at Savings and loan credit with assessment criteria: loan value, total income, loan term and collateral value. The tsukamoto fuzzy method was used in this study. Tsukamoto fuzzy method consists of four steps.: fuzzification, Forming fuzzy rules, application of implication functions using the MIN function and defuzzification using the weighted average calculation method. In this research, it was found that Tsukamoto's fuzzy method can be applied to the creditworthiness assessment process at the Saving and Credit Cooperatives. This is because the accuracy rate of the decision results from the tsukamoto method is 93.75%. A total of 60 data out of 64 data are in accordance with the eligibility decision at one of Saving and loan Cooperatives in West Java, Indonesia. Tsukamoto fuzzy method can optimize the credit assessment process in Savings and loan Cooperatives because the eligibility assessment process becomes more efficient and objective.

The greening of lending: Evidence from banks’ pricing of energy efficiency before climate-related regulation

Shocks to energy prices can have a direct impact on homeowners’ disposable income, affecting their ability to repay their mortgage and the risk of default. Energy-efficiency increases the collateral value of a property as it can provide some protection not only against increasing energy prices but also against the upfront costs of having to comply with future tightening of environmental regulations. Anecdotally, driven by either risk management and/or corporate and social responsibility, lenders have increasingly included the energy transition risk factor in the lending risk when differentiating mortgage interest rates based on energy efficiency without the need for regulatory intervention. To gather evidence of the lenders’ pricing decisions, we study interest rates of mortgages originated in the UK prior to 2018, the period before recent regulation came in. We estimate standard pricing models using a unique dataset of 1.8 million mortgages. We find no evidence of lenders charging higher rates on riskier mortgages against energy-inefficient properties. Overall, our findings do not provide conclusive evidence that lenders took energy efficiency and hence the energy transition risk into account when setting interest rates. These results contribute to the debate on lenders’ risk management and the role of regulation in the greening of the economy.

Collateral shocks and M&A decisions

We find that positive collateral shocks caused by increases in local real estate prices increase firms' propensities to undertake mergers and acquisitions (M&As). This effect is more pronounced for financially constrained and bank-dependent firms. After collateral value appreciation, acquirers issue more bank debt, secured debt, and lines of credit to finance acquisitions and show a preference for cash offer over equity offer to finance M&As. M&As driven by positive collateral shocks create value for acquiring shareholders in the long-run by avoiding overpayments, and generating synergies. Overall, our findings highlight the importance of the collateral channel in affecting the propensity and performance of M&A deals.

Navigating the 2023 US Housing Market: Impact on Residential Mortgage-Backed Securities

This article discusses the outlook for the US housing market and its expected impact on the trading dynamics of residential mortgage-backed securities (RMBS) in 2023. Despite the current reduced affordability of housing due to higher mortgage rates and surging home values, single family home prices are unlikely to experience a sharp decline, with growth expected in the second half of the year. The limited housing supply will lead to increased upward pressure on home prices and stronger performance in RMBS. Non-Qualified Mortgage (non-QM) products may face a challenging year in 2023, with delinquencies and losses expected to rise. Credit performance will be critical, and demand for affordability products is likely to increase. Overall, the outlook for the RMBS market remains challenging due to rising interest rates, tightening monetary policy, and the expected increase in the supply of MBS. However, the high level of home equity in the US housing market will create skin in the game for borrowers as well as higher collateral values to protect against credit deterioration.

Bank Regulatory Capital Arbitrage: Evidence from Housing Overappraisals

The overstatement of asset collateral values reduces bank capital requirements. We identify this novel form of regulatory arbitrage by studying housing overappraisals, the difference between housing collateral values computed by appraisers and actual transaction prices. We leverage granular loan-level data from Spain and a kink in the scheme of residential mortgage risk weights to show that tighter regulatory requirements cause larger overappraisals. This bias depends on the relationship between appraisers and banks; appraisers inflate mortgage collateral values only for their major customer banks. On average, overappraisals lower risk-weighted mortgages by 9%. Mortgage overappraisals allow banks to free up regulatory capital to support additional risk-taking in the corporate loan market. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4805 .

Factors That Affect the Realization of MSME Financing at Sharia Bankaltimtara Samarinda

This research was motivated by the importance of financing the MSME sector based on syariah principles to overcome the problem of limited MSME business capital and avoid the element of usury. The research aims to determine what factors had a significant effect on the realization of MSME financing at the Sharia Bankaltimtara, Samarinda. To analyze the factors that influenced the realization of MSME financing, the used method was multiple linear regression analysis. The independent variables were estimated, namely the age of the customer, the level of education of the customer, the length of the business of the customer, the net income per month, the type of business, the composition of venture capital, collateral value, and type of financing contract. Multiple linear regression analysis was tested with the SPSS 23.0 statistical tool. This research finds that there are two factors that have a significant influence on the realization of MSME financing at Sharia Bankaltimtara, Samarinda, namely the customer's net profit per month and the value of the financing collateral.

Monetary Policy, Corporate Finance, and Investment

Abstract In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability, and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that these types of financial frictions play an important role in the transmission of monetary policy.

Financial risk and resiliency on US dairy farms: Measures, thresholds, and management implications

Given the revenue and cost volatility with resulting tight profit margins in dairy farming, it is increasingly important to measure, monitor, and understand farm financial risk. Solvency, liquidity, debt repayment capacity, and financial efficiency measures can reveal potential problem areas and assist in financial risk management. Financial risk is defined as uncertainty about interest rates, willingness of lender to keep or put money into the business, ability to meet cash flow needs, and the market value of collateral. Financial resilience is defined as the ability to withstand events that impact firm net income. Solvency was measured by equity to asset ratio. Liquidity was measured by current ratio. Repayment capacity was measured by debt coverage ratio. Financial efficiency was measured by operational expense ratio and net farm income ratio. Critical thresholds for these farm financial measures include those determined by US agricultural lenders since maintaining access to outside capital is important for farm financial management. To demonstrate these concepts and measure financial risk and resilience, this research uses farm data from a balanced panel of 105 New York dairy farms from 2010 through 2019. Results reveal that there were 4 average, 2 good, and 4 poor financial years for these operations on average as measured by farm profitability. Solvency positions were relatively stable being based on long-term asset and liability values. During the poor years, the percent of farms below danger thresholds for liquidity and debt repayment capacity spiked.

Endogenous Cycles in Collateralized Credit

AbstractThis paper presents a simple and tractable equilibrium model, where collateralized credit emerges under limited commitment. We show that even if there is no time variation in fundamentals, credit trade can fluctuate endogenously over time. In our theory, credit fragilities are associated with endogenous fluctuations in trade probabilities, collateral values, and lending volumes.

Cash Holdings and R&D Intensity with Different Controlling Shareholders

Introduction/Main Objectives: This research aims to examine the effects of cash holdings on a firm’s R&D intensity. We further examine how that relationship may be varied across different controlling share­holders. For robustness reasons, we test it in a developing market and a developed market. Background Problems: Economics and business theories state that research and development (R&D) is susceptible to financing constraints due to the lack of collateral value and asymmetric information issues. This argument has been extensively debated with no consensus being reached. Therefore current study focuses on the examination of R&D and cash holding and the role of controlling shareholders. Novelty: The current study considers the importance of controlling shareholders on the relationship between cash holding and R&D intensity. We expect that different controlling shareholders will have different constraints on R&D financing. Research Methods: This study focuses on a sample of public listed companies in Malaysia and Singapore from the year 2012 to 2018, and estimates the model under a two-step GMM panel regression to eliminate the endogeneity issue. Finding/Results: The results show that cash holdings have significant effects on the intensity of R&D. However, that relationship is different across countries and across controlling shareholders. Malaysia’s foreign firms will increase their R&D’s intensity when their cash holdings are high. Meanwhile, Singaporean family firms will reduce the intensity of their R&D when their cash holdings are high. Overall the findings confirm the hypothetical alignment of the agency theory and also the resource-based view theory. Conclusion: Our findings surmise that higher cash holdings cause a lower R&D intensity due to the cash management decisions by managers. A firm with high leverage tends to reduce its R&D intensity when cash holdings are high, and vice versa. This behavior can be found in all the controlling shareholders.

In the shadow of big tech lending

We investigate the impact of Big Tech lending on non-bank traditional lenders, which have a more overlapping clientele with Big Tech lenders than traditional banks. Our empirical methodology exploits geographical differences in Big Tech penetration ratios and adopts the instrumental variable (IV) approach using the FinTech payment adoption ratio and the distance to the Big Tech's headquarter. We find that the competition from Big Tech worsens the performance of branches facing stronger Big Tech competition by reducing the number of borrowers and the amount of loans. Moreover, branches in cities highly penetrated by Big Tech lending tighten the lending standard by reducing loan-to-value (LTV) ratios, measured as the approved loan amount per unit collateral value, while keeping the average collateral requirement unchanged. Our findings are consistent with the cream-skimming hypothesis that Big Techs possess better screening technology and reduce the quality of borrowers applying for traditional loans. Our results document novel changes in and responses of the non-bank traditional lending business in the Big Tech era.

ANALYSIS OF THE INTERACTION OF REAL ESTATE AND FINANCIAL MARKETS OF THE REPUBLIC OF ARMENIA OVER THE PAST FIVE YEARS

The real estate market is influenced by the development of the real and financial sectors, as supply and demand in this market depend on the state of the economy and the financial system of the country. The vulnerability of financial stability from fluctuations in real estate prices is mainly considered from the point of view of lending to the construction industry and loans secured by real estate, the materialization of risks of changes in the value of collateral. Sharp fluctuations in supply/demand for real estate, and consequently prices, may adversely affect the security and quality of bank loans, creating risks in terms of financial stability. The real estate market is an extremely important economic player. Real estate, in addition to meeting one of the most important needs of society, is one of the main "reserves" of wealth in the economy. Thus, in developing countries, the market value of shared real estate is usually many times higher than the capitalization of financial markets and the volume of investments coming into the country. This is a unique source of economic "energy". The evaluation and analysis of real estate in Armenia, the use of weak analysis methodology, are considered to be the causes of problems in the real estate market with incorrect versions and procedures, the lack of high-quality data on local markets, unreasonable market research and investment decisions based on them.

Spatially Targeted LTV Policies and Collateral Values

Spatially Targeted LTV Policies and Collateral Values

ТЕОРЕТИЧНІ АСПЕКТИ ОЦІНКИ В СИСТЕМІ БУХГАЛТЕРСЬКОГО ОБЛІКУ

Enterprises often request the services of valuation expertise and value consulting, and in some cases, conduct it themselves. The purpose of the article is to determine the theoretical aspects of assessment in the accounting system. The task was to determine what the reality of the assessment in accounting is. To determine the value of the actual cost, costing is used a method of calculating the cost, a means of binding the object according to one or another price of a certain assessment. It was concluded that it is very difficult to objectively assess profitability, which leads to a variety of financial assessments, including tax, investment and credit assessments. It has been established that tax assessment is related to the fact that each type of tax or fee usually requires special methods of property assessment for taxation purposes. It was concluded that investment estimates can be used in predictive studies when calculating the efficiency of future capital investments. It is emphasized that credit evaluations are designed to measure the value of collateral for loans. So, valuation as an accounting method, is a way of monetary expression of the objects of this accounting (property, liabilities, business transactions) by means of summarizing costs in order to reflect them in accounting. The reality of the assessment consists in the calculation and display of the true size of certain types of funds, including the sources of their formation (the monetary expression of the accounting objects must correspond to their actual value).

The Impact of Collateral Value on Mortgage Originations

The Impact of Collateral Value on Mortgage Originations

Did They Do It Differently? Capital Structure Choices of Public and Private Sectors in Pakistan

Capital structure is one of the most complex areas of strategic financial decision making due to its interrelationship with other financial decision variables. For more than four decades discussion in corporate finance concerns the question of optimal capital structure: Given a level of total capital necessary for supporting firm’s activities, is there a way of dividing this capital into debt and equity which maximises firm value? And, if so, what are the critical factors in setting the leverage ratio for a given firm? Corporate finance literature is overwhelmed by this hot debate, which is still going on, about firm value triggered by the two conflicting conclusions of Modigliani and Miller (1958, 1963). For a comprehensive review of this literature, see Harris and Raviv (1991). The theoretical and empirical research about the optimal capital structure has so far been inconclusive and conflicting. However, the capital structure approach to firm value has been successful to replace heuristics with more methodical approach to define capital structure of the firm. The researchers have theoretically as well as empirically identified many endogenous and exogenous factors affecting the firm’s leverage. They have theoretically and empirically identified agency costs, information asymmetry, taxes, non-debt tax shields, growth, firm size, assets’ collateral value and tangibility, profitability and liquidity, earnings variability, expected costs of financial distress, industry classification, country factor, and firm’s international activities as the determinants of firm’s debt-equity choices.

Українські банки в умовах воєнного стану

In the conditions of martial law, Ukrainian banks have reduced their credit activity, which is largely due not to the deterioration of the resource base, but to the increase in credit risks. State-owned banks were the most vulnerable to the shock caused by the war. There is too large a share of bank income in total interest income from securities transactions, for some banks it is so large that it is more in line with the investment bank business model. Very large investments in government securities carry the potential risk of recognition of losses and the need to form reserves in amounts that can be compared to equity. The rate of formation of reserves for such financial instruments is very slow. State-owned banks were the most vulnerable to the shock caused by the war. The main reason for unprofitability is the formation of reserves. The impact of the trade outcome is significant for state-owned banks and banks with local capital. It is supposed that the National Bank could recommend banks to set limit values of appetite for the risk of investments in securities. In order to monitor the financial condition of banks, it is suggested to use the ratio between reserve formation costs and interest income to analyze the nature of losses or profits of banks. During the war, many production capacities of the holdings were damaged and require investment expenditures for their reconstruction or some time to restore functionality, or their collateral value will be hopelessly lost. Crisis measures should include the sale of part of the assets and the relocation of production facilities. Therefore, a special program of preferential early financing of investment projects is extremely necessary for the recovery of the national economy.