Abstract
We study secured lending contracts using a novel, loan-by-loan database of bilateral repurchase agreements in which borrower quality is fixed and collateral quality is known. Other things equal, lower-quality loans have longer maturities, indicating that borrowers’ concerns with refinancing risk override lenders’ incentives to engage in maturity rationing. Lower-quality loans also have higher spreads and margins, indicating that margin is lenders’ main risk management tool. As collateral quality drops, lenders take more risk and earn higher spread. Holding loan quality constant, one point of spread substitutes for approximately 9 points of margin.
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