Working Paper Series, University of Zurich, Department of Economics 220
In the aftermath of the global financial crisis, the market for unsecured credit literally dried out and collateral secured debt became the most widely used concept to coinsure against liquidity shocks. However, since financial assets are usually unproductive, the question comes up why institutions in the need of cash do not just simply sell these assets rather than using them as collateral. The aim of this paper is to develop a non-equivalence between secured credit and outright sale in the presence of asymmetric information and to show through a signaling game, why the willingness to deposit assets as collateral is a best response.
Liquidity Asymmetric Information Collateral Undefeated Equilibrium