Loan Terms and Collateral: Evidence from the Bilateral Repo Market
48 Pages Posted: 28 Nov 2015 Last revised: 30 Sep 2017
Date Written: December 9, 2016
We study secured lending contracts using a novel, loan-by-loan database of bilateral repurchase agreements in which borrower quality is fixed and collateral quality is known. Holding all risk factors constant except collateral quality, we show that loans on riskier collateral have higher spreads, that is, they remain riskier even though lenders require higher margins. We also document that lower-quality loans have longer maturity, driven by borrower rollover concerns. Our results suggest that maturity is not lenders' primary risk management tool. Holding loan quality constant (including collateral), we show that one point of spread substitutes for approximately 9 points of margin.
Keywords: Secured lending, Collateral, Margin, Interest rate, Repo
JEL Classification: G21, G23, G32, D86, D82
Suggested Citation: Suggested Citation