Title: Adverse selection and moral hazard in the credit market : using security interests to reduce credit rationing
Other Titles: Averechtse selectie en moral hazard in de kredietmarkt : het gebruik van zekerheden voor het tegengaan van kredietschaarste
Authors: Helsen, Frederic
Issue Date: 5-Nov-2016
Abstract: The credit market isn’t a regular market. In a regular market, supply and demand are brought together through price mediation. In the credit market, on the other hand, demand far exceeds supply: not everyone who applies for a loan ends up obtaining one. One would think that the price, in this case the interest rate, would simply increase in those circumstances, but this turns out not to be the case, and credit remains scarce, or “rationed”. This problem of credit rationing is a consequence of adverse selection and moral hazard, two economic phenomena that can cause a market to collapse, if left unchecked. In order to prevent this from happening, credit supply is kept at artificially low levels.
As credit is of the utmost importance to the economy, however, it is important to create tools that allow us to increase the supply of credit, while avoiding an uncontrollable increase in risk that would destroy the market. This dissertation analyzes the role that in rem security interests can play in this regard. It is quite intuitive that the reason why a lender requires collateral is to reduce his risk, and that doing so enables a borrower to more easily and cheaply obtain credit. However, there is a significant gap between this intuition and the design of a practically usable legal system of in rem security interests. The first step in this process is the development of a thorough understanding of the dynamics of the credit market, the processes that underlie adverse selection and moral hazard that threaten to destroy this market, and of how security interests interact with these processes. Consequently, this dissertation starts by devoting considerable attention to the economic literature on credit rationing, adverse selection and moral hazard, and secured lending theory. From this study, a normative functional framework is distilled, a structure that determines the functional lines along which a legal system of security interests should be designed in order to counteract credit rationing in a durable way.
This part is then followed by a legal framework, that focuses the lessons drawn from the economic framework, and translates them into actionable principles that can be used in the legal implementation of the system. In order to facilitate and enrich this transposition, US law is extensively used as a point of comparison. Indeed, economic analysis has been shaping US law for decades, and as far as security in movables is concerned, it has served as one of the primary examples for the recent Belgian reform. The legal framework therefore contains an extensive legal comparative study of the law of security in Belgium and the US. The basic structure of this comparison has been designed along functional lines, in order to optimally communicate between economic discourse and legal reality. This combination of a strong theoretical basis and the comparison with an expansive legal system that has been in operation for a long time on a significant scale, leads to a deeper understanding of the security interests system, and yields actionable knowledge in the implementation and application of the law of security in Belgium.
The reader of this dissertation will find a thorough analysis of the dynamics that underlie the process of lending, as well as explanations for some of the less straightforward phenomena observed in this market. In addition, it offers both recommendations to policy makers and lessons for practitioners.
Publication status: published
KU Leuven publication type: TH
Appears in Collections:Institute for Commercial and Insolvency Law

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