The Full Story of Runs

Abstract

We examine credit supply during a repo run. Lenders initially relax lending terms upon an initial bad signal about the borrower's creditworthiness. Lenders with a greater exposure to the borrower and a closer lending relationship show a longer period of patience, followed by a less acute credit contraction; so do lenders whose loans are backed by more illiquid assets. The initial credit relaxation is consistent with a lender's incentive to prolong its borrower's life. Other loan terms (price and maturity) remain stable, which suggests active role of collateral in dynamically managing risk exposure relative to price and maturity.

Keywords: Bank Run, Collateral Requirement, Lending Relationship

JEL Classification: D86, G33, G34, K22