Fire Sale Risk and Credit

46 Pages Posted: 26 Feb 2021 Last revised: 23 Aug 2021

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Francesco Mazzola

Erasmus University Rotterdam (EUR)

Wolf Wagner

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 10, 2021

Abstract

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

Bongaerts, Dion and Mazzola, Francesco and Wagner, Wolf, Fire Sale Risk and Credit (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=3783199 or http://dx.doi.org/10.2139/ssrn.3783199

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Francesco Mazzola

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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