Creditor Rights, Collateral Reuse, and Credit Supply

Abstract

Utilizing a change to bankruptcy treatment of repo collateral, I provide causal evidence that strengthened creditor rights increase credit supply and financial instability by increasing the reuse of collateral. I use the 2000’s housing boom and bust as a laboratory and collect data linking dealers’ repledgeable collateral to their lending to mortgage companies. Exposed dealers increased their repledgeable collateral and credit provision to mortgage companies. Mortgage companies responded by increasing originations and pivoting toward non-traditional products. I estimate that the expansion in credit drove a 9% increase in originations and accounted for 38% of defaults, consistent with a financial accelerator.