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Repo Runs

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Author Info

  • Martin, A.
  • Skeie, D.
  • Thadden, E.L. von

    (Tilburg University, Center for Economic Research)

Abstract

This paper develops a model of financial institutions that borrow short- term and invest into long-term marketable assets. Because these financial intermediaries perform maturity transformation, they are subject to runs. We endogenize the profits of the intermediary and derive distinct liquidity and solvency conditions that determine whether a run can be prevented. We first characterize these conditions for an isolated intermediary and then generalize them to the case where the intermediary can sell assets to prevent runs. The sale of assets can eliminate runs if the intermediary is solvent but illiquid. However, because of cash-in-the-market pricing, this becomes less likely the more intermediaries are facing problems. In the limit, in case of a general market run, no intermediary can sell assets to forestall a run, and our original solvency and liquidity constraints are again relevant for the stability of financial institutions.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-44S.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201044s

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Web page: http://center.uvt.nl

Related research

Keywords: Investment banking; securities dealers; repurchase agreements; tri-party repo; runs; financial fragility;

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References

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  1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  2. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
  3. Antoine Martin, 2001. "Liquidity provision vs. deposit insurance : preventing bank panics without moral hazard?," Research Working Paper RWP 01-05, Federal Reserve Bank of Kansas City.
  4. Bhattacharya, Sudipto & Padilla, A Jorge, 1996. "Dynamic Banking: A Reconsideration," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 1003-32.
  5. Jeremy C. Stein, 2011. "Monetary Policy as Financial-Stability Regulation," NBER Working Papers 16883, National Bureau of Economic Research, Inc.
  6. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
  7. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
  8. Oliver Hart & John Moore, 1998. "Default And Renegotiation: A Dynamic Model Of Debt," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 1-41, February.
  9. Daniel M. Covitz & Nellie Liang & Gustavo A. Suarez, 2009. "The evolution of a financial crisis: panic in the asset-backed commercial paper market," Finance and Economics Discussion Series 2009-36, Board of Governors of the Federal Reserve System (U.S.).
  10. Ernst-Ludwig von Thadden & Erik Berglöf & Gérard Roland, 2010. "The Design of Corporate Debt Structure and Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2648-2679, July.
  11. Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013. "Securitization without risk transfer," Journal of Financial Economics, Elsevier, vol. 107(3), pages 515-536.
  12. S. Viswanathan & Adriano A. Rampini, 2010. "Financial Intermediary Capital," 2010 Meeting Papers 1071, Society for Economic Dynamics.
  13. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  14. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2009. "Outside and Inside Liquidity," NBER Working Papers 14867, National Bureau of Economic Research, Inc.
  15. Gale, D. & Allen, F., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 14-91, Wharton School - Weiss Center for International Financial Research.
  16. Bhattacharya, S. & Boot, A.W.A. & Thakor, A.V., 1995. "The Economics of Bank Regulation," Papers 9516, Centro de Estudios Monetarios Y Financieros-.
  17. David R. Skeie, 2004. "Money and Modern Bank Runs," 2004 Meeting Papers 785, Society for Economic Dynamics.
  18. Adam Copeland & Antoine Martin & Michael Walker, 2010. "The tri-party repo market before the 2010 reforms," Staff Reports 477, Federal Reserve Bank of New York.
  19. Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2012. "Sizing Up Repo," NBER Working Papers 17768, National Bureau of Economic Research, Inc.
  20. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  21. Daniel Covitz & Nellie Liang & Gustavo A. Suarez, 2013. "The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market," Journal of Finance, American Finance Association, vol. 68(3), pages 815-848, 06.
  22. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Repo runs
    by Economic Logician in Economic Logic on 2010-05-28 15:10:00
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Cited by:
  1. Tobias Adrian Author-Name: Adam B. Ashcraft, 2012. "shadow banking: a review of the literature," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  2. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
  3. Adrian, Tobias, 2014. "Financial stability policies for shadow banking," Staff Reports 664, Federal Reserve Bank of New York.

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  1. Economic Logic blog

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