The Full Story of Runs
52 Pages Posted: 25 May 2017 Last revised: 25 Mar 2024
Date Written: November 15, 2023
Abstract
We examine credit supply during a repo run. Lenders initially relax lending terms upon an initial bad signal about the borrower’s creditworthiness. Lenders with a greater exposure to the borrower and a closer lending relationship intervene faster and show a longer period of patience, and so do lenders whose loans are backed by more illiquid assets. The initial credit relaxation is consistent with lenders having an incentive to prolong the borrower’s life. Other loan terms (price and maturity) remain stable, pointing to the central role of collateral in dynamically managing risk exposure.
Keywords: Bank Run, Collateral Requirement, Lending Relationship
JEL Classification: D86, G33, G34, K22
Suggested Citation: Suggested Citation