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

Wojakowski, R.M.; Ebrahim, M.S.; Jaafar, A.; Salleh, M.O.

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


Authors

R.M. Wojakowski

A. Jaafar

M.O. Salleh



Abstract

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.

Citation

Wojakowski, R., Ebrahim, M., Jaafar, A., & Salleh, M. (2019). Can a Loan Valuation Adjustment (LVA) Approach Immunize Collateralized Debt from Defaults?. Financial Markets, Institutions and Instruments, 28(2), 141-158. https://doi.org/10.1111/fmii.12109

Journal Article Type Article
Acceptance Date Sep 25, 2018
Online Publication Date Mar 5, 2019
Publication Date 2019
Deposit Date Sep 27, 2018
Publicly Available Date Mar 28, 2024
Journal Financial Markets, Institutions and Instruments
Print ISSN 0963-8008
Electronic ISSN 1468-0416
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 28
Issue 2
Pages 141-158
DOI https://doi.org/10.1111/fmii.12109
Public URL https://durham-repository.worktribe.com/output/1317913

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Copyright Statement
This is the accepted version of the following article: Wojakowski, R. M., Ebrahim, M. S., Jaafar, A. & Salleh, M. O. (2019). Can a Loan Valuation Adjustment (LVA) Approach Immunize Collateralized Debt from Defaults? Financial Markets, Institutions and Instruments 28(2): 141-158., 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 Wiley Terms and Conditions for self-archiving.




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