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Optimal loan size and mortgage rationing

Optimal loan size and mortgage rationing Shows that loan loss expectation plays an important role in determining credit rationing. Shows that the optimal loan size depends on the marginal loan loss, and not on the initial portfolio position of the bank. While an increase in loan administrative costs leads to a larger optimal loan size, restricting the loan size is used to minimize default risks. Also shows that under conditions of uncertainty when default risk is present, and if absolute risk aversion is increasing in wealth, a rise in wealth of the bank will lower the amount of asset to be allocated in risky loans even if credit can be properly priced. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Finance Emerald Publishing

Optimal loan size and mortgage rationing

Journal of Property Finance , Volume 8 (3): 12 – Sep 1, 1997

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Publisher
Emerald Publishing
Copyright
Copyright © 1997 MCB UP Ltd. All rights reserved.
ISSN
0958-868X
DOI
10.1108/09588689710175024
Publisher site
See Article on Publisher Site

Abstract

Shows that loan loss expectation plays an important role in determining credit rationing. Shows that the optimal loan size depends on the marginal loan loss, and not on the initial portfolio position of the bank. While an increase in loan administrative costs leads to a larger optimal loan size, restricting the loan size is used to minimize default risks. Also shows that under conditions of uncertainty when default risk is present, and if absolute risk aversion is increasing in wealth, a rise in wealth of the bank will lower the amount of asset to be allocated in risky loans even if credit can be properly priced.

Journal

Journal of Property FinanceEmerald Publishing

Published: Sep 1, 1997

Keywords: Borrowing; Credit; Financing; Loans; Mortgages

References