Pledgeable Collateral, Dealer Leverage, and Runs

Husnu C. Dalgic (), Brittany Almquist Lewis () and Andrea Modena ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We show that strengthening creditor rights can exacerbate financial instability, par ticularly under long debt maturities and low collateral volatility. We build a model of financial intermediaries that raise financing by pledging collateral in the sale and repurchase (repo) market. In the short term, increasing collateral pledgeability makes repo creditors safer and reduces debt rollover risk; however, it also expands long-term debt capacity and leverage, ultimately heightening run risk. This instability is a dis tinct feature of environments with long-term liabilities and low-volatility assets, where market discipline fails to constrain post-policy leverage. We test our model’s predic tions by exploiting the 2005 BAPCPA bankruptcy reform, which expanded creditor protections via repo safe harbors. Using hand-collected data on dealer repo collateral, we confirm that while the law enhanced collateral pledgeability, it fueled short-term leverage and precipitated sharper de-leveraging during the downturn

Keywords: repo; collateral; safe harbor; bankruptcy; leverage; dealer banks; bank runs. (search for similar items in EconPapers)
JEL-codes: G01 G21 G23 G28 G33 (search for similar items in EconPapers)
Pages: 41
Date: 2026-09
New Economics Papers: this item is included in nep-cfn, nep-fdg, nep-ifn, nep-mon and nep-rmg
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