Study On The Function Of Mortgage In Credit Risk Decision

Credit risk is the main risk in the operations of bank. Mortgage loan is critical in the situation of lacking the credit documents of company and individual. However, there are some obstacles, such as the bad effect of mortgage which led to high rate of bad debt and high financial risk. Thus, it is significant to analyze the credit risk for preventing and dealing with the credit risk.Theoretically, the paper analyzes the hostage mechanism in the situation of information asymmetry, points out the signaling role from the aspects of contract theory and credit rationing theory, and studies on the default evaluation from the aspects of the default concept and probability of default concept. The analyses above prove the feasibility of using mortgage in the credit risk decision. Empirically, the paper illustrates the theory foundation of ordered multi-variable discrete choice model. Based on the logical consistency between bank acceptance and credit, financial, non-financial, and credit-supported indexes are selected to establish the statistic model of signaling the credit risk.Conclusions are as follows: Firstly, mortgage plays the signaling role in credit risk decision, which can reduce the adverse selection and moral hazard. The rational set of mortgage in the credit contract can distinguish the high risk and low risk companies effectively, at the same time, mortgage loan contract can inspire the entrepreneurs to work hard to the high limit. Secondly, there is a good result of the statistic model empirically, especially in the field of judging good company, which proves the mortgage's signaling effect in the credit rating. The more mortgage and the more sum of credit, the less probability of default; the more priori probability of default based on the financial indexes and the longer term, the more probability of default.