Repo Runs: Evidence from the Tri-Party Repo Market

Copeland, Adam; Martin, Antoine; Walker, Michael

doi:10.2139/ssrn.1906766

Cited by 98 publications

(106 citation statements)

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“…This is consistent with the evidence of Copeland, Martin, and Walker (2014) who document in the tri-party repo market, a key funding market for financial intermediaries, that lenders simply refused to roll over funding to troubled banks rather than adjusting interest rates.…”

Section: Introductionsupporting

confidence: 87%

“…1 The realization of rollover risk as the dry-up of short-term funding is well documented for the asset-backed commercial paper market (Kacperczyk and Schnabl, 2010;Covitz, Liang, and Suarez, 2013) and the market for repurchase agreements (Gorton and Metrick, 2012;Copeland, Martin, and Walker, 2014). This has inspired theoretical work on the mechanisms underlying rollover risk in market-based funding, highlighting the fragility of the collateral assets' debt capacity (Acharya, Gale, and Yorulmazer, 2011) or separating the contributions of liquidity concerns and solvency concerns (Morris and Shin, 2010).…”

Section: Introductionmentioning

confidence: 99%

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Rollover risk as market discipline: A two-sided inefficiency

Eisenbach

2017

Journal of Financial Economics

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Why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises? This paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk. However, if assets are correlated, a two-sided inefficiency arises: Good aggregate states have intermediaries taking excessive risks, while bad aggregate states suffer from costly fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline. In equilibrium, financial intermediaries inefficiently amplify both positive and negative aggregate shocks.

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Section: Introductionsupporting

confidence: 87%

Section: Introductionmentioning

confidence: 99%

Rollover risk as market discipline: A two-sided inefficiency

Eisenbach

2017

Journal of Financial Economics

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“…Finally, to emphasize the empirical importance of the problem we study, we remark that several papers suggest that the systemic risk that built up in the repo market may have played an important role in the financial crisis of 2008(Copeland, Martin, and Walker 2014, Gorton and Metrick (2010, Gorton and Metrick (2012), Krishnamurthy, Nagel, and Orlov (2014)). 7…”

Section: Realism and Empirical Evidencementioning

confidence: 93%

Resaleable debt and systemic risk

Donaldson

Micheler

2018

Journal of Financial Economics

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Many debt claims, such as bonds, are resaleable, whereas others, such as repos, are not. There was a fivefold increase in repo borrowing before the 2008 crisis. Why? Did banks' dependence on non-resaleable debt precipitate the crisis? In this paper, we develop a model of bank lending with credit frictions. The key feature of the model is that debt claims are heterogeneous in their resaleability. We find that decreasing credit market frictions leads to an increase in borrowing via non-resaleable debt. Borrowing via non-resaleable debt has a dark side: it causes credit chains to form, since if a bank makes a loan via non-resaleable debt and needs liquidity, it cannot sell the loan but must borrow via a new contract. These credit chains are a source of systemic risk, since one bank's default harms not only its creditors but also its creditors' creditors. Overall, our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions. This paper is published as part of the Systemic Risk Centre's Discussion Paper Series. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. Did banks' dependence on non-resaleable debt precipitate the crisis? In this paper, we develop a model of bank lending with credit frictions. The key feature of the model is that debt claims are heterogenous in their resaleability. We find that decreasing credit market frictions leads to an increase in borrowing via non-resaleable debt. Borrowing via non-resaleable debt has a dark side: it causes credit chains to form, since if a bank makes a loan via non-resaleable debt and needs liquidity, it cannot sell the loan but must borrow via a new contract. These credit chains are a source of systemic risk, since one bank's default harms not only its creditors but also its creditors' creditors. Overall, our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions.

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“…One example is the effective elimination of traditional bank-runs through the introduction of deposit insurance. Another example is evidence that suggests that repo margins in the tri-party market, i. e., using a clearing house, were much more stable than those in the bilateral market (Copeland, Martin & Walker, 2014).…”

Section: Third Variable: the Level Of Trust And Confidencementioning

confidence: 99%

“…19 The size of the repo market is difficult to estimate because of the lack of official statistics and issues of double counting. Gorton and Metrick (2012) estimated it to be around US$ 10 trillion (p. 433), although Copeland, Martin, and Walker (2014) Under traditional banking, banks transform illiquid assets into liquid liabilities (Diamond & Dybvig, 1983) and perform a crucial role in the lubrication of the real economy. Today, liquidity is increasingly created outside the traditional banking sector.…”

mentioning

confidence: 99%

An Asset-Based Framework of Credit Creation (applied to the Global Financial Crisis)

Becke

Sornette

2017

Accounting, Economics, and Law: A Convivium

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Abstract:We develop a conceptual asset-based framework of credit creation based on three leading variables: (i) the amount of assets acceptable as collateral, (ii) the level of leverage and (iii) the level of trust. As credit expands along these dimensions in a non-linear dynamic, the financial system becomes more liquid. At the same time, it becomes more prone to endogenous feedbacks and vulnerable to internally generated instabilities manifested as booms and busts. Applying this framework to the global financial crisis, we show that the subprime crisis was both a signature and only one possible trigger in an increasingly unstable financial system. Using historical data, we demonstrate a significant shift in the components of US bank balance sheets and a decoupling of bank assets from deposits since the mid-1980s, marking the rise of "securitized-fractional reserve banking". The subsequent decades were a period of growing leverage, with debt-securities assuming money-like functions and serving as collateral for further credit creation. As trust began to recede, the high levels of leverage were no more viable, precipitating a reduction of the amount of assets acceptable as collateral, and leading to a contraction in credit and to liquidity spirals. We discuss the potential general applicability of this framework of credit creation and define extensions in future research.

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Repo Runs: Evidence from the Tri-Party Repo Market

Cited by 98 publications

References 12 publications

Rollover risk as market discipline: A two-sided inefficiency

Rollover risk as market discipline: A two-sided inefficiency

Resaleable debt and systemic risk

An Asset-Based Framework of Credit Creation (applied to the Global Financial Crisis)

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