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Can a Loan Valuation Adjustment (LVA) Approach Immunize Collateralized Debt from Defaults?

Wojakowski, Rafal, Ebrahim, M. Shahid, Jaafar, Aziz and Salleh, Murizah Osman (2018) Can a Loan Valuation Adjustment (LVA) Approach Immunize Collateralized Debt from Defaults? Financial Markets, Institutions & Instruments.

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Abstract

This study focuses on structuring tangible asset backed loans to inhibit their endemic option to default. We adapt the pragmatic approach of a margin loan in the configuring of collateralized debt to yield a quasi-default-free facility. We link our practical method to the current Basel III (2017) regulatory framework. Our new concept of the Loan Valuation Adjustment (LVA) and novel method to minimize the LVA converts the risky loan into a quasi risk-free loan and achieves value maximization for the lending financial institution. As a result, entrepreneurial activities are promoted and economic growth invigorated. Information asymmetry, costly bailouts and resulting financial fragility are reduced while depositors are endowed with a safety net equivalent to deposit insurance but without the associated moral hazard between risk-averse lenders and borrowers.

Item Type: Article
Divisions : Faculty of Arts and Social Sciences > Surrey Business School
Authors :
NameEmailORCID
Wojakowski, Rafalr.wojakowski@surrey.ac.uk
Ebrahim, M. Shahid
Jaafar, Aziz
Salleh, Murizah Osman
Date : 2018
Copyright Disclaimer : This is the peer reviewed version of an article accepted for publication in Financial Markets, Institutions & Instruments, and will be available in final form at: https://onlinelibrary.wiley.com/journal/14680416. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
Uncontrolled Keywords : collateral, loan default, financial innovation, financial regulation, financial fragility, agency cost.
Depositing User : Melanie Hughes
Date Deposited : 12 Oct 2018 13:26
Last Modified : 12 Oct 2018 13:26
URI: http://epubs.surrey.ac.uk/id/eprint/849657

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