Loan Terms and Collateral: Evidence from the Bilateral Repo Market

Jun Kyung Auh and Mattia Landoni

Journal of Finance, 2022, vol. 77, issue 6, 2997-3036

Abstract: We study secured lending contracts using a proprietary, loan‐level database of bilateral repurchase agreements containing groups of simultaneous loans backed by multiple tranches within a securitization. We show that lower‐quality loans (i.e., loans backed by lower‐rated collateral) have higher margins and spreads. We calibrate a model using collateral asset prices and find that lower‐quality loans are riskier despite the higher margins, yet cheaper for the borrower. This finding is consistent with a combination of lender optimism and reaching for yield. We also show that lower‐quality loans have longer maturity, consistent with models of rollover concerns with asymmetric information.

Date: 2022
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https://doi.org/10.1111/jofi.13184

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:77:y:2022:i:6:p:2997-3036

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