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Repo runs

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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.

Suggested Citation

  • Antoine Martin & David R. Skeie & Ernst-Ludwig von Thadden, 2010. "Repo runs," Staff Reports 444, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:444
    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.
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    More about this item

    Keywords

    investment banking; financial fragility; bilateral repo; repurchase agreements; runs; money market mutual funds; asset-backed commercial paper; tri-party repos; securities dealers;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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