Selecting the Optimum Collateral in Shipping Finance

Abstract

Banks select convenient loan collateral assets to secure the uninterrupted service of a loan facility. In the adverse case of a borrower in default, collateral assets provide critical last resort coverage for bank loan recovery. Nevertheless, collaterals may provide least protection when they are most needed. Recessionary economic cycle phases, unstable capital markets, liquidity constraints and financial crises amplify abrupt downward collateral value shifts. This, in turn, can result to outstanding loans being exposed to diminishing collateral values, substantially increasing the bank's asset-liability mismatch. This study proposes an integrated and flexible framework to support a preferential collateral asset selection process for lending banks. Two multi-criteria decision making methods are critically compared and evaluated, in order to gain insight into the identification, evaluation and ranking process of important quantitative and qualitative collateral selection criteria. Bank shipping finance is undertaken as an empirical case study.