Does a Larger Menu Increase Appetite? Collateral Eligibility and Bank Risk-Taking

57 Pages Posted: 5 Nov 2015 Last revised: 29 Jan 2019

See all articles by Sjoerd van Bekkum

Sjoerd van Bekkum

Erasmus University

Marc Gabarro

University of Mannheim

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: June 22, 2017

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.

Keywords: Central Bank Collateral Policy; ECB; Bank Loan Supply; Mortgage Lending; Mortgage-Backed Securities; State Guarantees

JEL Classification: E58, G21, G28

Suggested Citation

van Bekkum, Sjoerd and Gabarro, Marc and Irani, Rustom M., Does a Larger Menu Increase Appetite? Collateral Eligibility and Bank Risk-Taking (June 22, 2017). Available at SSRN: https://ssrn.com/abstract=2686604 or http://dx.doi.org/10.2139/ssrn.2686604

Sjoerd Van Bekkum (Contact Author)

Erasmus University ( email )

P.O. Box 1738
Rotterdam, NL 3062 PA
Netherlands

Marc Gabarro

University of Mannheim ( email )

Mannheim, 68131
Germany

HOME PAGE: http://https://finance.uni-mannheim.de/home

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance ( email )

College of Business
1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://rirani.web.illinois.edu

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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