Financial constraints and collateral crises

Assessing the fundamental value of a wide range of asset-backed securities is costly. As aresult, these assets can become information insensitive, which allows them to be used as collateralin credit transactions. In this paper, we show that while it is true that information-insensitiveassets can play a liquidity role, the fact that they play this role reinforces their informationinsensitivity. This implies that the availability of alternative ways of financing can harm theliquidity role of assets, even if these alternatives are costly and not used in equilibrium. Thereason is that such options raise the asset’s sensitivity to information by increasing the relativeimportance of their fundamental value vis-a-vis their role as collateral