[Animats]

No, the assumption is that the collateral can be liquidated at (1-x%) of loan value, and that the bank has x% in loan reserve capital to make up the losses.

[22c]

Yes, you are quite correct. I believe the point still stands, that there is nothing inherently pegging collateral + reserve to it's loan value.

If the risk of default is too high, banks usually won't give out loans without some form of insurance.