Collateral Determinants in Bank Risk Management: The Regional Case

Alexander M. Karminsky – Doctor of Science (Economics, Technics), Professor in Department of economics, Higher School of Economics. Moscow, 20 Myasnitskaya ul., 101000. Е-mail:
Olga D. Khon – Senior lecturer in Department of finance, HSE St. Petersburg, St. Petersburg, 16, Soyuza Pechatnikov str., 191021. Е-mail:
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DOI 10.24833/2071-8160-2018-1-58-169-185 (Read the article in PDF)

Regional banks are struggling with significant obstacles in the modern Russian economy. Among them are strong competition with major big banks, strong resource restrictions, tightening the Bank of Russia’s requirements, and quite rapid expansion of financial technologies. Thus, the reduction of regional banks occurs, that produces both a negative impact on the development of small and medium enterprises (SMEs) and challenges for balanced competition on the Russian market. Basically, these banks provide the settlement of region’s social and economic problems while maintaining local companies and enterprises. Collateral, as a source for losses covering, became the essential element of credit risk management in banks. Providing lenders to implement such instruments, it helps to reduce bank losses under borrower’s default. The purpose of the article relates to revealing of collateral determinants with higher impact on bank risk with the application of empirical methods (including regional level). This study is based on linear regression models evaluated by the least square method. Private data of secured small and medium business loans is used. This article presents LTV (loan-to-value) as a major collateral determinant. The empirical evidence of interlinkage between collateral requirements, by the means of LTV, and risk premium is provided for loan portfolio of Russian regional banks. The hypothesis that LTV conversely correlates with risk premium is statistically proved.

Key words: collateral, credit risk, regional banks, probability of default, default of borrower, loan-tovalue.

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