Journal of Credit Risk

Risk.net

Art-secured lending: a risk analysis framework

Arturo Cifuentes and Ventura Charlin

  • Identify three types of risks involved in art-secured lending transactions
  • Present a framework to assess their combined effects via a numerical simulation
  • Derive closed-form expressions suitable for a single-artwork collateral
  • Introduce several risk-related metrics to describe the lender’s risk exposure

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.

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