Discussion paper

DP15798 Fire Sale Risk and Credit

This paper examines whether the risk of a future collateral fire sale affects lending decisions. We study US mortgage applications and exploit
exogenous variation in foreclosure frictions for identification. We find lenders to be less likely to approve mortgages when anticipated losses due to uncoordinated collateral liquidations are high, and when there iselevated risk of joint collateral liquidation. These results suggest that
fire-sale risk has implications for credit allocation, and that lenders' collective origination decisions mitigate fire sale risk ex-post. However,
we also find the effects to be significantly weaker outside periods in which fire sales are salient.


Bongaerts, D, F Mazzola and W Wagner (2021), ‘DP15798 Fire Sale Risk and Credit‘, CEPR Discussion Paper No. 15798. CEPR Press, Paris & London. https://cepr.org/publications/dp15798