Loan Terms and Collateral: Evidence from the Bilateral Repo Market

48 Pages Posted: 28 Nov 2015 Last revised: 30 Sep 2017

See all articles by Jun Kyung Auh

Jun Kyung Auh

Georgetown University - Department of Finance

Mattia Landoni

Southern Methodist University (SMU) - Finance Department

Date Written: December 9, 2016

Abstract

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

Auh, Jun Kyung and Landoni, Mattia, Loan Terms and Collateral: Evidence from the Bilateral Repo Market (December 9, 2016). Available at SSRN: https://ssrn.com/abstract=2695646 or http://dx.doi.org/10.2139/ssrn.2695646

Jun Kyung Auh

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

Mattia Landoni (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

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