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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 (2019) Can a Loan Valuation Adjustment (LVA) Approach Immunize Collateralized Debt from Defaults? Financial Markets, Institutions & Instruments, 28 (2). pp. 141-158.

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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 : May 2019
DOI : 10.1111/fmii.12109
Copyright Disclaimer : © 2019 The Authors. Financial Markets, Institutions & Instruments published by New York University Salomon Center and Wiley Periodicals, Inc. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Uncontrolled Keywords : Collateral; Loan default; Financial innovation; Financial regulation; Financial fragility; Agency cost; D53; G10; G20; G28
Depositing User : Melanie Hughes
Date Deposited : 12 Oct 2018 13:26
Last Modified : 26 Jul 2019 08:03
URI: http://epubs.surrey.ac.uk/id/eprint/849657

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