Does a Larger Menu Increase Appetite? Collateral Eligibility and Credit Supply

Sjoerd Van Bekkum, Marc Gabarro, Rustom M. Irani

Research output: Contribution to journalArticle

Abstract

We examine a change in the European Central Bank's collateral framework, which significantly lowered the rating requirement for eligible residential mortgage-backed securities (RMBS), and its impact on bank lending and risk-Taking in the Netherlands. Banks most affected by the policy increase loan supply and lower interest rates on new mortgage originations. These lower-interest-rate loans serve as collateral for newly issued RMBS with lower-rated tranches and subsequently experience worse repayment performance. The performance deterioration is pronounced among loans with state guarantees, which suggests that looser collateral requirements may lead to undesired credit risk transfer to the sovereign.

Original languageEnglish (US)
Pages (from-to)943-979
Number of pages37
JournalReview of Financial Studies
Volume31
Issue number3
DOIs
StatePublished - Mar 1 2018

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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