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>The loans have collateral behind them, often real estate. There's still an assumption that the real estate can be liquidated 1:1 for the loan value, though.
by 22c 5y ago
>The loans have collateral behind them, often real estate.
There's still an assumption that the real estate can be liquidated 1:1 for the loan value, though.
I think the difference is not so much the collateral, but the insurance.
- Animats 5y agoNo, the assumption is that the collateral can be liquidated at (1-x%) of loan value, and that the bank has x% in loan reserve capital to make up the losses.
- 22c 5y agoYes, you are quite correct. I believe the point still stands, that there is nothing inherently pegging collateral + reserve to it's loan value. If the risk of default is too high, banks usually won't give out loans without some form of insurance.