The Role of Margin and Spread in Secured Lending: Evidence from the Bilateral Repo Market
We study bilateral repurchase agreements in a novel database with one borrower and many lenders. Margins and spreads increase together with lender risk as collateral quality declines. We observe different margins and spreads for contemporaneous contracts on identical collateral, with one point of spread substituting for nine points of margin. Lender characteristics drive substitution: we observe lower margins and higher spreads with (i) less creditworthy lenders, and (ii) lenders with more funding from money market funds. As borrower default risk increases, margins (but not spreads) rise faster when the collateral is more opaque, suggesting a special role for margin.