Search Results
Working Paper
What Drives U.S. Treasury Re-use?
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when ...
Working Paper
Why Rent When You Can Buy?
Using a model with bilateral trades, we explain why agents prefer to rent the goods they can afford to buy. Absent bilateral trading frictions, renting has no role even with uncertainty about future valuations. With pairwise meetings, agents prefer to sell (or buy) durable goods whenever they have little doubt on the future value of the good. As uncertainty grows, renting becomes more prevalent. Pairwise matching alone is sufficient to explain why agents prefer to rent, and there is no need to introduce random matching, information asymmetries, or other market frictions.
Journal Article
Case studies on disruptions during the crisis
The 2007-09 financial crisis saw many funding mechanisms challenged by a drastic reduction in market liquidity, a sharp increase in the cost of transactions, and, in some cases, a drying-up in financing. This article presents case studies of several key financial markets and intermediaries under significant distress at this time. For each case, the author discusses the size and evolution of the funding mechanism, the sources of the disruptions, and the policy responses aimed at mitigating distress and making markets more liquid. The review serves as a reference on the vulnerabilities of ...
Working Paper
Securities Financing and Asset Markets: New Evidence
This paper presents new evidence on bilateral securities financing based on the Federal Reserve's Senior Credit Officer Opinion Survey, which was launched in the wake of the financial crisis to provide a window into this otherwise opaque market. The survey asks large broker-dealers about terms at which they fund client positions, and the demand for such funding, across several different collateral types. Within asset classes, reported changes in spreads, haircuts, and other financing terms move closely together, and we show that they also covary with the state of the underlying cash ...
Working Paper
Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility
In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from ...
Discussion Paper
Are Higher Haircuts Better? A Paradox
Repurchase agreement (repo) markets played an important role in the 2007-09 financial crisis in the United States, and much discussion since then has focused on the role of repo haircuts. A repo is essentially a loan collateralized by securities. Typically, the value of the securities exceeds the value of the loan and the amount of overcollateralization corresponds to the haircut. In a 2010 paper, Yale?s Gary Gorton and Andy Metrick identified a dramatic increase in haircuts in the bilateral segment of the repo market, which they interpreted as a run on repo. Separately, an industry task ...
Working Paper
Emergency Collateral Upgrades
During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid ...
Working Paper
Demand Segmentation in the Federal Funds Market
This paper outlines a model of demand segmentation in the federal funds market with two types of borrowers - the "interest on reserves (IOR) arbitrage'' type and the "regulatory'' type - which have different reservation prices and cannot always be separated. When fed funds trade above IOR, the "regulatory" type is revealed and consequently pays an interest rate closer to its real reservation price, pushing the fed funds rate further up. When fed funds trade below IOR, a decrease in the fed funds rate encourages entry in the market for IOR arbitrage purposes thus counteracting the downward ...
Working Paper
Collateral Runs
This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than ...
Working Paper
The Regulatory and Monetary Policy Nexus in the Repo Market
We examine the interaction of regulatory reforms and changes in monetary policy in the U.S. repo market. Using a proprietary data set of repo transactions, we find that differences in regional implementation of Basel III capital reforms intensified European dealers' window-dressing by 80%. Money funds eligible to use the Fed's reverse repo (RRP) facility cut their private lending almost by half and instead lent to the Fed when European dealers withdraw, contributing to smooth implementation of Basel III. In a difference-in-differences setting, we show that ineligible funds lent 15% less to ...