IDEAS home Printed from https://ideas.repec.org/a/tek/journl/v2y2013i1p41-77.html
   My bibliography  Save this article

The Run On Repo and the Liquidity Shortage Problems of the Current Global Financial Crisis: Europe vs. The US

Author

Listed:
  • Beniamino Moro

    (University of Cagliari, Italy)

Abstract

This paper discusses several key issues regarding the current Great Crisis, which has extended over two periods. The first period covered the 2007-09 subprime crisis in the US, while the second took the form of a twin sovereign debt and banking crisis in Europe after 2010, and persists until now. At the core of the problem is the emergence over the last 30 years of a shadow banking system, which re-created the conditions for a panic. This time, the panic firstly took place in the repo market, which suffered a run when “de- positors” demanded ever-increasing haircuts. Fears of insolvency reduced interbank lending, and this so-called “run on repo” caused temporary disrup- tions in the pricing system of short-term debt markets. The subsequent crisis reduced the pool of assets considered acceptable as collateral, resulting in a liquidity shortage. With declining asset values and more frequent haircuts, the US banking system was effectively insolvent for the first time since the Great Depression. Via the banking system, the Ameri- can “run on repo” soon infected the European financial system, becoming both a twin sovereign debt and banking debacle in many peripheral Euro area countries that raised doubts of the survival of the Euro and the regular func- tioning of the European Monetary System. The paper concludes that, for a successful European crisis resolution, we need to implement both a fiscal union and a banking union, ensuring that fiscal and banking policies in the Eurozone are partly centralized so as to meet the requirements necessary for the regular functioning of a monetary union.

Suggested Citation

  • Beniamino Moro, 2013. "The Run On Repo and the Liquidity Shortage Problems of the Current Global Financial Crisis: Europe vs. The US," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(1), pages 41-77, January.
  • Handle: RePEc:tek:journl:v:2:y:2013:i:1:p:41-77
    as

    Download full text from publisher

    File URL: http://ekonomitek.org/pdffile/no4_08_beniamino_moro.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Warwick J. McKibbin & Andrew B. Stoeckel & YingYing Lu, 2014. "Global Fiscal Adjustment and Trade Rebalancing," The World Economy, Wiley Blackwell, vol. 37(7), pages 892-922, July.
    2. Yochanan Shachmurove, 2012. "Failing Institutions Are at the Core of the U.S. Financial Crisis," PIER Working Paper Archive 12-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    4. repec:cuf:journl:y:2015:v:16:i:1:reinhart:rogoff is not listed on IDEAS
    5. Ulrich Volz, 2013. "Lessons of the European crisis for regional monetary and financial integration in East Asia," Asia Europe Journal, Springer, vol. 11(4), pages 355-376, December.
    6. Silvana Bartoletto & Bruno Chiarini & Elisabetta Marzano, 2012. "The Sustainability of Fiscal Policy in Italy: A Long-Term Perspective," CESifo Working Paper Series 3812, CESifo.
    7. Bank for International Settlements, 2001. "Collateral in wholesale financial markets: recent trends, risk management and market dynamics," CGFS Papers, Bank for International Settlements, number 17.
    8. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    9. Mr. Manmohan Singh & Mr. Peter Stella, 2012. "Money and Collateral," IMF Working Papers 2012/095, International Monetary Fund.
    10. Sturm, Michael & Sauter, Nicolas, 2010. "The impact of the global financial turmoil and recession on Mediterranean countries’ economies," Occasional Paper Series 118, European Central Bank.
    11. Michele Fratianni, 2008. "Financial Crises, Safety Nets and Regulation," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 169-208.
    12. Carmen M. Reinhart & Vincent R. Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 5(1), pages 9-62.
    13. Charles Wyplosz, 2010. "The Eurozone in the Current Crisis," Finance Working Papers 22825, East Asian Bureau of Economic Research.
    14. Driffill, John, 2013. "Financial Shocks, Unemployment, and Public Policy," CEPR Discussion Papers 9321, C.E.P.R. Discussion Papers.
    15. Gary Gorton & Andrew Metrick, 2012. "Getting Up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 128-150, March.
    16. Hans J. Blommestein, 2012. "The Debate over Sovereign Risk, Safe Assets, and the Risk-Free Rate: What are the Implications for Sovereign Issuers?," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 1(3), pages 55-70, September.
    17. Michael Tomz & Mark L.J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 247-272, May.
    18. Bertrand Candelon & Franz Palm, 2010. "Erratum to: Banking and Debt Crises in Europe: The Dangerous Liaisons?," De Economist, Springer, vol. 158(3), pages 337-340, September.
    19. James B. Bullard, 2010. "Quantitative easing: uncharted waters for monetary policy," The Regional Economist, Federal Reserve Bank of St. Louis, issue Jan, pages 1-3.
    20. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    21. John C. Hull, 2009. "The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can be Learned?," World Scientific Book Chapters, in: Douglas D Evanoff & Philipp Hartmann & George G Kaufman (ed.), The First Credit Market Turmoil Of The 21st Century Implications for Public Policy, chapter 11, pages 161-174, World Scientific Publishing Co. Pte. Ltd..
    22. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    23. Udaibir S. Das & Yinqiu Lu & Michael G. Papaioannou & Iva Petrova, 2013. "Sovereign Risk and Asset and Liability Management—Conceptual Issues," Journal of Reviews on Global Economics, Lifescience Global, vol. 2, pages 330-355.
    24. Bank for International Settlements, 2011. "The impact of sovereign credit risk on bank funding conditions," CGFS Papers, Bank for International Settlements, number 43.
    25. Alan Greenspan, 2010. "The Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 201-261.
    26. Gary Gorton, 2008. "The panic of 2007," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 131-262.
    27. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    28. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    29. Moro, Alessio & Nuño, Galo, 2012. "Does total-factor productivity drive housing prices? A growth-accounting exercise for four countries," Economics Letters, Elsevier, vol. 115(2), pages 221-224.
    30. C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis," Policy Briefs PB12-1, Peterson Institute for International Economics.
    31. Assaf Razin & Steven Rosefielde, 2011. "Currency and Financial Crises of the 1990s and 2000s," CESifo Economic Studies, CESifo Group, vol. 57(3), pages 499-530, September.
    32. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    33. Gorton, Gary B & Pennacchi, George G, 1993. "Security Baskets and Index-Linked Securities," The Journal of Business, University of Chicago Press, vol. 66(1), pages 1-27, January.
    34. Lerner, Josh, 2006. "The new new financial thing: The origins of financial innovations," Journal of Financial Economics, Elsevier, vol. 79(2), pages 223-255, February.
    35. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    36. Utzig, Siegfried, 2010. "The Financial Crisis and the Regulation of Credit Rating Agencies: A European Banking Perspective," ADBI Working Papers 188, Asian Development Bank Institute.
    37. Bertrand Candelon & Franz Palm, 2010. "Banking and Debt Crises in Europe: The Dangerous Liaisons?," De Economist, Springer, vol. 158(1), pages 81-99, April.
    38. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    39. Kristin Forbes, 2012. "The "Big C": Identifying Contagion," NBER Working Papers 18465, National Bureau of Economic Research, Inc.
    40. Yochanan Shachmurove, 2011. "Reoccurring Financial Crises in the United States," PIER Working Paper Archive 11-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    41. Roger E.A. Farmer & Carine Nourry & Alain Venditti, 2012. "The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World," NBER Working Papers 18647, National Bureau of Economic Research, Inc.
    42. Robert C. Merton, 1992. "Financial Innovation And Economic Performance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 12-22, January.
    43. Gorton, Gary & Pennacchi, George, 1990. "Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    44. Oecd, 2010. "Labour markets and the crisis," OECD Economics Department Working Papers 756, OECD Publishing.
    45. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    46. Siegfried Utzig, 2010. "The Financial Crisis and the Regulation of Credit Rating Agencies : A European Banking Perspective," Finance Working Papers 21990, East Asian Bureau of Economic Research.
    47. Marion Kohler, 2010. "Exchange rates during financial crises," BIS Quarterly Review, Bank for International Settlements, March.
    48. repec:bla:manchs:v:81:y:2013:i:s2:p:1-15 is not listed on IDEAS
    49. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    50. Javier Suarez, 2010. "The Spanish Crisis: Background and Policy Challenges," Working Papers wp2010_1005, CEMFI.
    51. Dani Rodrik, 2012. "The Turkish Economy after the Global Financial Crisis," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 1(1), pages 41-61, January.
    52. Beniamino Moro, 2012. "The Theoretical Debate on Recent Great Crisis," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 3-42.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Olalere Oluwaseyi Ebenezer & Md. Aminul Islam & Wan Sallha Yusoff & Farid Ahammad Sobhani, 2019. "Exploring Liquidity Risk and Interest-Rate Risk: Implications for Profitability and Firm Value in Nigerian Banks," Journal of Reviews on Global Economics, Lifescience Global, vol. 8, pages 315-326.
    2. Sever, Can, 2014. "Systemic Liquidity Crisis with Dynamic Haircuts," MPRA Paper 55602, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Giampaolo Gabbi & Alesia Kalbaska & Alessandro Vercelli, 2014. "Factors generating and transmitting the financial crisis: The role of incentives: securitization and contagion," Working papers wpaper56, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    2. Laurent Le Maux & Laurence Scialom, 2013. "Central banks and financial stability: rediscovering the lender-of-last-resort practice in a finance economy," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 37(1), pages 1-16.
    3. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    4. Luc Laeven, 2011. "Banking Crises: A Review," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 17-40, December.
    5. Roy, Saktinil & Kemme, David M., 2012. "Causes of banking crises: Deregulation, credit booms and asset bubbles, then and now," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 270-294.
    6. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Rainer Masera, 2011. "Taking the moral hazard out of banking: the next fundamental step in financial reform," PSL Quarterly Review, Economia civile, vol. 64(257), pages 105-142.
    8. Ricardo J Caballero, 2010. "Sudden Financial Arrest," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 6-36, August.
    9. Angela Maddaloni & Jose-Luis Peydro, 2011. "Bank Risk-taking, Securitization, Supervision, and Low Interest Rates: Evidence from the Euro-area and the U.S. Lending Standards," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2121-2165.
    10. Karatas, B., 2014. "Financial crisis and monetary policy," Other publications TiSEM 41e463f0-e122-4379-8db5-6, Tilburg University, School of Economics and Management.
    11. Connor, Gregory & Flavin, Thomas & O’Kelly, Brian, 2012. "The U.S. and Irish credit crises: Their distinctive differences and common features," Journal of International Money and Finance, Elsevier, vol. 31(1), pages 60-79.
    12. Eijffinger, Sylvester C.W. & Karataş, Bilge, 2023. "Three sisters: The interlinkage between sovereign debt, currency, and banking crises," Journal of International Money and Finance, Elsevier, vol. 131(C).
    13. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, March.
    14. Gary B. Gorton, 2012. "Some Reflections on the Recent Financial Crisis," NBER Working Papers 18397, National Bureau of Economic Research, Inc.
    15. Kauko, Karlo, 2014. "How to foresee banking crises? A survey of the empirical literature," Economic Systems, Elsevier, vol. 38(3), pages 289-308.
    16. Chung‐Hua Shen & Hsing‐Hua Hsu, 2022. "The determinants of Asian banking crises—Application of the panel threshold logit model," International Review of Finance, International Review of Finance Ltd., vol. 22(1), pages 248-277, March.
    17. Abdilahi Ali & Katsushi S. Imai, 2015. "Editor's choice Crises, Economic Integration and Growth Collapses in African Countries," Journal of African Economies, Centre for the Study of African Economies, vol. 24(4), pages 471-501.
    18. Carmen M. Reinhart, 2022. "From Health Crisis to Financial Distress," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(1), pages 4-31, March.
    19. Marc Hayford & Anastasios Malliaris, 2010. "Asset Prices and the Financial Crisis of 2007--09: An Overview of Theories and Policies," Forum for Social Economics, Taylor & Francis Journals, vol. 39(3), pages 279-286, January.
    20. Carmen M. Reinhart & Takeshi Tashiro, 2013. "Crowding out redefined: the role of reserve accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-43.

    More about this item

    Keywords

    Financial crisis; shadow banking system; panic; sovereign debt crisis; banking crisis;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tek:journl:v:2:y:2013:i:1:p:41-77. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ercan Uygur (email available below). General contact details of provider: https://edirc.repec.org/data/tekkkea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.