This thesis investigates the impact of the liquidity level of collaterals on the probability of default of individual loans and examines the channels through which collaterals affect default risks. Following the approach of Jiménez and Saurina (2004), binominal logit model is applied on the data from individual loan accounts of a medium – size commercial bank in Vietnam. The empirical results suggest the significant and negative impact of collaterals’ liquidity on loans’ probability of default, supporting the dominance of borrower selection effect and risk shifting effect over lender selection effect. Moreover, the finding also implies that bank has not applied carefully and thoroughly screening process on loans that are fully secured by low liquid collaterals and therefore impaired the credit quality of loan portfolio.
University of Economics Ho Chi Minh City; VNP (Vietnam – The Netherlands Programme for M.A. in Development Economics)