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Loan Terms and Collateral: Evidence from the Bilateral Repo Market

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  • JUN KYUNG AUH
  • MATTIA LANDONI

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.

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  • Jun Kyung Auh & Mattia Landoni, 2022. "Loan Terms and Collateral: Evidence from the Bilateral Repo Market," Journal of Finance, American Finance Association, vol. 77(6), pages 2997-3036, December.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:6:p:2997-3036
    DOI: 10.1111/jofi.13184
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    Cited by:

    1. Christian Julliard & Gabor Pinter & Karamfil Todorov & Kathy Yuan, 2022. "What drives repo haircuts? Evidence from the UK market," BIS Working Papers 1027, Bank for International Settlements.

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