Creditor rights, collateral reuse, and credit supply
According to Griffin, Kruger, and Maturana (JFE, 2021), “ten years after the financial crisis, the central question of what explains the rise and fall in house prices remains unresolved.” In “Creditor Rights, Collateral Reuse, and Credit Supply” (JFE, 2024), I seek to address this central question by critically analyzing the contribution of the Bankruptcy Abuse Prevention and Consumer […]
Brittany Lewis is an Assistant Professor of Finance at Olin Business School, Washington University in St. Louis. This post is based on her recent article forthcoming in the Journal of Financial Economics.
According to Griffin, Kruger, and Maturana (JFE, 2021), “ten years after the financial crisis, the central question of what explains the rise and fall in house prices remains unresolved.” In “Creditor Rights, Collateral Reuse, and Credit Supply” (JFE, 2024), I seek to address this central question by critically analyzing the contribution of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) 2005 in the build up to and unfolding of the Global Financial Crisis (GFC) of 2008.
In addressing this question, the paper combines micro hand-collected data, an innovative research design, and a quasi-random experiment. The research design causally links BAPCPA to an expansion of credit supply that directly funded the mortgages most exposed to default in the GFC. BAPCPA expanded the sale and repurchase, or “repo,” market’s “safe harbors” in the Bankruptcy Code to include mortgages loans, mortgage related securities and interest on mortgage loans and mortgage related securities. This change granted mortgage collateral preferred bankruptcy treatment and only affected private-label or risky mortgage collateral, since agency mortgage collateral had been granted this status in 1984.
