Repo Runs

Martin, Antoine; Skeie, David and Thadden, Ernst-Ludwig von (November 2013): Repo Runs. SFB/TR 15 Discussion Paper No. 448

Abstract

The recent financial crisis has shown that short-term collateralized borrowing may be a highly unstable source of funds in times of stress. The present paper develops a dynamic equilibrium model and analyzes under what conditions such instability can be a consequence of market-wide changes in expectations. 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.

• Item Type: Paper
• Keywords: Investment banking, repurchase agreements, tri-party repo, bilateral repo, money market mutual funds, asset-backed commercial paper, bank runs.
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > C9 - Stabilität, Wettbewerb und Liquidität in Finanzmärkten
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: E44, E58, G24
• Language: English