Art as Collateral

Abstract

High market values and the recognition of its investment potential have made art a source of collateral for loans. Firms specializing in art lending have emerged to serve this market. This study explores the effect of regional variations in economic and financial conditions on art-backed lending activities. The authors show that demand for art loans increases when the economy experiences a downturn and liquidity needs are high. They compare the demand for art-secured loans with home equity loans and test a pecking order theory for the borrowing of high-net-worth individuals. The findings suggest that art as substitute collateral is increasingly used when home equity loans are difficult to obtain.

Key Findings

• ▪ With the expansion of the high-end market for art and increased attention to its economic value in recent years, art has become an asset that can serve as loan collateral. The Uniform Commercial Code, under which debtors retain possession while creditors can register their security interest in the collateral, may also facilitate some of the art-backed lending in the United States.

• ▪ Using various regional economic performance measures, this study shows that some collectors borrow when the economy does not perform well. This supports the hypothesis that art may serve, in certain circumstances, as emergency collateral to smooth adverse economic shocks.

• ▪ Art is used as collateral when home equity loans are difficult to obtain and when housing prices decline. This is also consistent with the hypothesis that collectors borrow from nonbank creditors in times of financial distress to meet liquidity needs.