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

Sjoerd van Bekkum¹; Marc Gabarro²; Rustom M. Irani³

¹ Erasmus University Rotterdam · ² University of Mannheim · ³ University of Illinois at Urbana–Champaign

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. Received June 14, 2016; editorial decision September 8, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

DOI

10.1093/rfs/hhx112

Volume

31 (3)

Pages

943-979

Language

en

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