Creditor rights, collateral reuse, and credit supply

Brittany Almquist Lewis

Journal of Financial Economics, 2023, vol. 149, issue 3, 451-472

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; Creditor rights; Rehypothecation; Money multiplier; Bapcpa (search for similar items in EconPapers)
JEL-codes: G01 G20 G23 G33 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:149:y:2023:i:3:p:451-472

DOI: 10.1016/j.jfineco.2023.06.001

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