Art-secured Lending: A Risk Analysis Framework
28 Pages Posted: 19 Jan 2021
Date Written: March 6, 2020
In recent years, art-secured lending has grown in both size and popularity. Yet, this business still lacks a well-accepted approach to assess the risks involved. To that end, in this study, we identify the three types of risks involved in an art-secured lending operation and present a framework to assess their combined effects via a Monte Carlo simulation. In addition, we derive some useful closed-form expressions that are suitable when the collateral consists of only one painting. To help decision makers and risk managers, we introduce a number of risk-related metrics that provide a detailed characterization of the lending operation risk proﬁle. We conclude that with the customary loan-to-value ratios currently prevalent in the art-based lending business (around 50%), the lender’s exposure is quite bounded. Moreover, the advantages of having a diversiﬁed collateral, from a risk perspective, are relevant. Finally, we ﬁnd that the uncertainty related to the value of a painting is much more important than the uncertainty related to either the credit risk proﬁle of a borrower or the artist’s returns during the period that a loan remains outstanding.
Keywords: ﬁnancial risk management, Monte Carlo simulation, art-secured lending, market risk, credit risk
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