Does a Larger Menu Increase Appetite? Collateral Eligibility and Credit Supply
Does a Larger Menu Increase Appetite? Collateral Eligibility and Credit Supply Sjoerd Van Bekkum Marc Gabarro Erasmus University Rotterdam University of Mannheim Rustom M. Irani 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 a↵ected 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. (JEL E58, G21, G28) We thank Philip Strahan (the editor), two anonymous referees, Tobias Berg, Christoph Bertsch, Stijn Claessens, Joao Cocco, R¨udiger Fahlenbrach, Andreas Fuster, Gary Gorton, Kjell Nyborg, Steven Ongena, Rafael Repullo, Richard Rosen, Benjamin Sahel, Sascha Ste↵en, Vikrant Vig, Paolo Volpin, Larry Wall, Sebastian Weber, and Xin Zhang; our discussants Lamont Black, Stefano Corradin, Matteo Crosignani, Artashes Karapetyan, Thomas Kick, Amiyatosh Purnanandam, Raluca Roman, Philipp Schnabl, Manmohan Singh, Jiri Woschitz, and Jan Wrampelmeyer; seminar participants at the Dutch National Bank, Erasmus School of Economics,
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