The Full Story of Runs
59 Pages Posted: 25 May 2017 Last revised: 6 Dec 2017
Date Written: November 1, 2017
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
Suggested Citation: Suggested Citation