11-34 Willingness to post collateral may be a signal of more rather than less credit risk on the part of the borrower.

Question

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Posting collateral indicates that the borrower is willing to put up assets as security, which suggests that they may be perceived as higher credit risk by the lender. If the borrower defaults, the lender has a claim on the collateral, which can reduce their losses but does not eliminate the risk of default entirely. Furthermore, borrowers who are unable or unwilling to post collateral may have stronger creditworthiness or better access to alternative sources of funding, which can reduce their need for external financing. Therefore, the willingness to post collateral may be a signal of credit risk rather than creditworthiness.

11-34 Willingness to Post Collateral May Be a Signal of More