The Risk of Fire Sales in the Tri-Party Repo Market

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper studies the risk of "fire sales" in the tri-party repo market, a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients' assets. We distinguish between fire sales of assets by a dealer who, facing a run that could lead to default, sells securities to generate liquidity, and fire sales of assets by repo investors after a dealer's default has occurred. While fire sales do cause damage no matter how they arise, the tools available to lessen the harm from the two types of fire sales are different. We find that limited tools are available to mitigate the risk of pre-default fire sales and that no established tools currently exist to mitigate the risk of post-default sales.

Shadow Banking Out of the Shadows: Non-Bank Intermediation and the Italian Regulatory Framework

“…Martin, Skeie and von Thadden (2011) provided a model for a run in repo markets that takes into account the empirical facts of the Bear Stearns and Lehman crises. They showed that runs on repos occurred both in the bilateral repo market (characterized by a sharp increase in haircuts) and in the tri-party repo market (Begalle et al (2013). showed that in this market the level of margins and the amount of funding remained stable for most borrowers during the crisis.…”

Reference Guide to U.S. Repo and Securities Lending Markets

“…Asset fire sales have the potential to amplify and transmit systemic risk through two possible channels: (i) fire sales of assets when a dealer faces default and sells securities in its inventory preemptively to raise liquidity, and (ii) broader fire sales of assets by repo investors, who liquidate securities held as collateral after a dealer default has occurred (see Begalle et al, 2013). The first type of fire sale is being addressed, albeit partially, through prudential regulations that encourage individual firms to reduce reliance on short-term repo funding.…”

A Market Based Solution for Fire Sales and Other Pecuniary Externalities

“…This is but one example. There is also a literature on fire sales in New York financial markets, e.g Begalle et al (2013); Duarte and Eisenbach (2014); Gorton and Metrick (2012); Krishnamurthy et al (2012).…”