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Federal Reserve Bank of New York
Staff Reports
Repo runs
Antoine Martin
David R. Skeie
Ernst-Ludwig Von Thadden

This paper develops a model of financial institutions that borrow short-term and invest in long-term marketable assets. Because these financial intermediaries perform maturity transformation, they may be vulnerable to runs. We endogenize the profits of an intermediary and derive distinct liquidity and solvency conditions that determine whether a run can be prevented. We first characterize these conditions for an isolated intermediary and then generalize them to cases in which the intermediary can sell assets to prevent runs. The sale of assets can eliminate runs if the intermediary is solvent but illiquid. However, because of cash-in-the-market pricing, this possibility becomes less likely as more intermediaries face problems. In the limit, if a general market run occurs, no intermediary can sell assets to forestall a run, and our original solvency and liquidity constraints are again relevant for the stability of financial institutions.

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Antoine Martin & David R. Skeie & Ernst-Ludwig Von Thadden, Repo runs, Federal Reserve Bank of New York, Staff Reports 444, 2010.
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Keywords: Intermediation (Finance) ; Investment banking ; Securities ; Liquidity (Economics) ; Repurchase agreements ; Financial markets
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