EconPapers    
Economics at your fingertips  
 

The Role of Collateral in Borrowing

Nicholas Garvin, David Hughes and Jose-Luis Peydro ()
Additional contact information
Nicholas Garvin: Reserve Bank of Australia
David Hughes: Massachusetts Institute of Technology

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: This paper studies the role of collateral in credit markets under stress. Australian interbank markets at the time of the Lehman Brothers failure present a platform for identification, because the collateral is liquid and homogenous across borrowers (unlike in retail credit markets), the shock is large and exogenous (unlike in countries with bank failures), and there is comprehensive administrative collateralised and uncollateralised loan-level data. After the exogenous shock, collateralised and uncollateralised borrowing compositions diverge. Uncollateralised borrowing declines ex ante riskier borrowers while collateralised borrowing increases for borrowers ex ante holding more high-quality collateral. Moreover, riskier banks with sufficient high-quality collateral substitute from uncollateralised to collateralised borrowing. In aggregate, collateralised borrowing expands substantially, predominantly collateralised against second-best (but still high quality) collateral, while interest rates on loans against first-best collateral fall substantially, indicating scarcity of the most-liquid safe assets. This liquid asset demand encourages collateralised lending, contrary to cash hoarding.

Keywords: collateral; repo; safe assets; credit crunch; unsecured versus secured loans (search for similar items in EconPapers)
JEL-codes: G01 G10 G21 G28 H63 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-ban
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.rba.gov.au/publications/rdp/2021/pdf/rdp2021-01.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2021-01

Access Statistics for this paper

More papers in RBA Research Discussion Papers from Reserve Bank of Australia Contact information at EDIRC.
Bibliographic data for series maintained by Paula Drew ().

 
Page updated 2021-09-03
Handle: RePEc:rba:rbardp:rdp2021-01