Pricing and Risks of Secured Lending in the Times of Quantitative Easing

This master's thesis analyzes pricing and risks on the secured loan market. The model of margins and interaction between the agents has been built in two-leveled financial sector. The main agents in the model are banks and funds - investors in the collateral which is assumed to be real estate. Banks minimize their expected losses - it is formalized through the function of the expected losses taking into account quantitative easing – the banks’ funding costs can be neglected due to zero interest rates. Funds maximize their profitability according to the mandate on the long-term investment horizon; the cost of funds is the interest expense. The model assumes dependency of the margin on two factors - the ratio of the loan amount to the target value of the collateral and transaction size. This structure of the margin formation has been tested empirically. Further, the equilibrium was figured out analytically, which means that after some time after the start of the round of the monetary easing program further liquidity injection measures through the banking channel of transmission are not effective. It has been proven and tested empirically, that bank lending amounts in the real estate sector depends solely on the constant characterizing the elasticity of the margin size to the collateral size, determined in each country from the parameters of its banking sector, as well as from the conditions of the collateral market. This implies two possible measures to stimulate economic growth – one should refuse to increase the current "helicopter money" programs, but rather initiate legislation changes leading to adoption of the margin formation in the secured lending segment and return the credit risk perception of the market participants to the “old normal”, as well as the refusal of direct stimulation of the aggregate demand with the cheap money, but instead governments should turn attention to the formation of an adequate long-term investors target/utility functions.