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Concerning The Seizure Of Collateral In Collateralized Loan Markets

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  • ADRIANO CAMPOS MENEZES

    (Banco do Brasil, SAUN Qd. 5 Lt. B - Edifício Banco do Brasil, Torre Norte, 6th Floor, 700040-912, Brasília, D.F., Brazil)

  • JAIME ORRILLO

    (#x2020;Universidade Católica de Brasília, SGAN 916-Módulo B, 70790-000 Brasília, D.F., Brazil)

Abstract

This paper deals with the frictions which arise in the transfer of collateral from borrowers to lenders in case of default in collateralized loans. We propose a simple model of collateralized loans in which the sale of assets (borrowing) is tied to the purchase of a put option written on the collateral whose exercise price is the value of debt made by the borrower who is the holder of the put. Thus, lenders protect themselves against the possibility of not being able to seize the collateral in case of default. We show that this new financial mechanism does not destroy the orderly function of markets. Lastly, a remark on efficiency will be offered.

Suggested Citation

  • Adriano Campos Menezes & Jaime Orrillo, 2018. "Concerning The Seizure Of Collateral In Collateralized Loan Markets," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 1-9, September.
    • Handle: RePEc:wsi:afexxx:v:13:y:2018:i:03:n:s2010495218500136
    DOI: 10.1142/S2010495218500136
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    References listed on IDEAS

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