Does a Larger Menu Increase Appetite? Collateral Eligibility and Bank Risk-Taking
57 Pages Posted: 5 Nov 2015 Last revised: 29 Jan 2019
Date Written: June 22, 2017
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.
Keywords: Central Bank Collateral Policy; ECB; Bank Loan Supply; Mortgage Lending; Mortgage-Backed Securities; State Guarantees
JEL Classification: E58, G21, G28
Suggested Citation: Suggested Citation