Is there evidence of lessors’ recovery risk management capability?

A part of the literature (for example Bester 1987) points out that collaterals and guarantees could be a device available to debtors for signalling the ex-ante quality of investment projects. Therefore, if credit were properly contracted, borrowers with higher credit quality would subscribe contracts with higher collateralisation levels. The above argument, nevertheless, neglects an important fact of real world credit markets. If financial intermediaries have the capability of properly assessing risk components, they can try to control overall risk by managing LGD: an increase in PD may be offset by a commensurate decrease in LGD through higher collateralisation and/or more protective contractual structures. The argument should be true especially for the leasing market, in consideration of the nature of the specific credit contract where the leased asset is a sort of “internal collateral”. At this regard we can offer empirical evidence, based on two portfolios of leasing contracts, which indicate: a) the good ex-ante risk managing capability of intermediaries that are able to balance the probability of default and the loss given default case by case, using the proper contracts structures and choosing the necessary collateralisation level, b) their careful management of recovery procedures strategies.