The impossibility of effective enforcement mechanisms in collateralized credit markets

Abstract

Abstract. We analyze the possibility of the simultaneous presence of three key features in pricetaking credit markets: infinity horizon, collateralized credit operations and effective additional enforcement mechanisms, i.e. those implying payments besides the value of the collateral guarantees.We show that these additional mechanisms, instead of strengthening, actually weaken the restrictions that collateral places on borrowing. In fact, when collateral requirements are not large enough in relation to the effectiveness of the additional mechanisms, lenders anticipate total payments exceeding the value of the collateral requirements. Thus, by non-arbitrage, they lend more than the value of these guarantees. In turn, in the absence of other market frictions such as borrowing constraints, agents may indefinitely postpone their debts, implying the collapse of the agent's maximization problem and of such credit markets.

Endogenous debt constraints in collateralized economies with default penalties

“…The recent contributions of Seghir (2009) andFerreira andTorres-Martínez (2010) show that the positive results in Araujo, Páscoa, and Torres-Martínez (2002) may not be robust: the effectiveness of collateral requirements to bound debt may not be valid anymore in the natural case where there are other mechanisms leading agents to overpay, that is, to repay more than the collateral when the value of their debt actually exceeds the collateral value.…”

“…Default was introduced in a general equilibrium setting by Dubey, Geanakoplos, and Shubik (1990) and Zame (1993). Modern theoretical contributions on default include among others, Dubey, Geanakoplos, and Zame (1995), Geanakoplos (1997), Geanakoplos and Zame (2002), Araujo, Páscoa, and Torres-Martínez (2002), Kubler and Schmedders (2003), Dubey, Geanakoplos, and Shubik (2005), Fostel and Geanakoplos (2008), Seghir (2009), Ferreira andTorres-Martínez (2010). There are also important contributions on default, collateral and credit constraints in macroeconomics (see Bernanke, Gertler, and Gilchrist (1996), Kiyotaki and Moore (1997) and Caballero and Krishnamurthy (2001)).…”

“…However, Ferreira and Torres-Martínez (2010) showed that, for sufficiently low collateral requirements, any effective additional enforcement mechanism implies the non-existence of physically feasible optimal plans.…”

“…Given the findings of Seghir (2009) andFerreira andTorres-Martínez (2010) we propose to answer the following question: what kind of borrowing constraints rule out Ponzi schemes and ensure existence of equilibria in models with limited commitment and (possible) default at equilibrium? As a first step to provide an answer to this question it is natural to investigate whether debt constraints that have been proposed in models with full commitment can be compatible with equilibrium existence in models with limited commitment.…”

Inadimplência e colateral na teoria microeconômica do equilíbrio dos mercados

“…a economia possui um equilíbrio de colateral exógeno. -Martínez (2010): horizonte infinito, colateral exógeno e pool de ativos TEOREMA 1: Sob certas condições (os recursos físicos agregados ocupados no nó E são positivos na árvore de eventos D, U i é contínua, côncava, estritamente crescente e finita), suponha que os mecanismos de coerção adicionais são persistentemente efetivos em uma sub-árvore D(E). Independentemente dos preços (p,q) há fronteiras superiores estritamen-te positivas (Ψη) η∈D(E) tais que, se as cestas de colaterais satisfazem min l∈L C (η,j,l) < Ψη então o problema do agente i não tem uma solução fisicamente viável.…”