TY - JOUR

T1 - Can a Loan Valuation Adjustment (LVA) Approach Immunize Collateralized Debt from Defaults?

AU - Wojakowski, Rafal M.

AU - Ebrahim, M. Shahid

AU - Jaafar, Aziz

AU - Osman Salleh, Murizah

N1 - This is the accepted version of the following article: Wojakowski, R.M., Ebrahim, M.S., Jaafar, A. and Osman Salleh, M., 2018. Can Loan Valuation Adjustment (LVA) approach immunize collateralized debt from defaults?. Financial Markets, Institutions & Instruments, which has been published in final form at https://doi.org/10.1111/fmii.12109. This article may be used for non-commercial purposes in accordance with the Wiley Self-Archiving Policy.

PY - 2019/5/31

Y1 - 2019/5/31

N2 - 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.

AB - 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.

U2 - 10.1111/fmii.12109

DO - 10.1111/fmii.12109

M3 - Article

VL - 28

SP - 141

EP - 158

JO - Financial Markets, Institutions and Instruments

JF - Financial Markets, Institutions and Instruments

SN - 1468-0416

IS - 2

ER -