Fire Sale Risk and Credit
46 Pages Posted: 26 Feb 2021 Last revised: 23 Aug 2021
Date Written: February 10, 2021
This paper examines whether the risk of future collateral fire sales affects lending decisions. We study US mortgage applications and exploit exogenous variation in foreclosure frictions for identification. We find that lenders are less likely to approve mortgages when anticipated losses due to uncoordinated collateral liquidations are high, and when there is elevated risk of joint collateral liquidation. As expected, these results are stronger when fire-sale risk is more salient. The results suggest that fire-sale risk has implications for credit allocation, and that lenders’ collective (ex-ante) origination decisions mitigate fire-sale exposures ex-post.
Keywords: fire sales, credit supply, foreclosure laws, creditor concentration, joint liquidation risk, collateral
JEL Classification: G01, G21, G28, G33
Suggested Citation: Suggested Citation