Repo runs

Abstract: The recent financial crisis has shown that short-term collateralized borrowing may be highly unstable in times of stress. The present paper develops a dynamic equilibrium model and shows that this instability can be a consequence of market-wide changes in expectations, but does not have to be. We derive a liquidity constraint and a collateral constraint that determine whether such expectations-driven runs are possible and show that they depend crucially on the microstructure of particular funding markets that we examine in detail. In particular, our model provides insights into the differences between the tri-party repo market and the bilateral repo market, which were both at the heart of the recent financial crisis.

Keywords: investment banking; financial fragility; bilateral repo; repurchase agreements; runs; money market mutual funds; asset-backed commercial paper; tri-party repo; securities dealers;

JEL Classification: E44; G24; E58;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2012-01-01

Number: 444

Pages: 42 pages

Note: For a published version of this report, see Antoine Martin, David Skeie, and Ernst-Ludwig von Thadden, "Repo Runs," The Review of Financial Studies 27, no. 4 (2014): 957-89.