Creditor Rights, Collateral Reuse, and Credit Supply

109 Pages Posted: 10 Mar 2021 Last revised: 26 Jun 2023

See all articles by Brittany Almquist Lewis

Brittany Almquist Lewis

Washington University St. Louis - Olin Business School

Date Written: March 5, 2021

Abstract

Securities dealers receive mortgages as collateral for credit lines provided to mortgage companies and reuse the same collateral to borrow money. Exploiting the 2005 BAPCPA rule change, which granted mortgage collateral preferred bankruptcy treatment, I find that strengthening creditor rights increases dealers’ collateral reuse. Increasing collateral reuse creates a money multiplier that increases credit supply. Using a novel dataset linking dealers to the mortgage companies they fund reveals that post-BAPCPA, dealers supply additional credit to mortgage companies by increasing credit lines and relaxing restrictions on collateral securing them. In response, mortgage companies increase origination volume and shift into riskier products.

Keywords: Repo market, creditor rights, rehypothecation, collateral reuse, overcollateralization, mortgage-backed securities, bapcpa

JEL Classification: G01, G23, G20, G10, G33

Suggested Citation

Lewis, Brittany, Creditor Rights, Collateral Reuse, and Credit Supply (March 5, 2021). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3773311 or http://dx.doi.org/10.2139/ssrn.3773311

Brittany Lewis (Contact Author)

Washington University St. Louis - Olin Business School ( email )

1 Brookings Drive
MSC 1133-124-242
St. Louis, MO MO 63105
United States

HOME PAGE: http://www.brittanylewis.org

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