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The risk of fire sales in the tri-party repo market

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  • Brian Begalle
  • Antoine Martin
  • James McAndrews
  • Susan McLaughlin

Abstract

This 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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 616.

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Date of creation: 2013
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Handle: RePEc:fip:fednsr:616

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Related research

Keywords: Repurchase agreements ; Securities ; Liquidity (Economics) ; Default (Finance);

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References

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  1. Gary Gorton & Andrew Metrick, 2010. "Securitized Banking and the Run on Repo," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  2. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  3. Krishnamurthy, Arvind & Nagel, Stefan & Orlov, Dmitry, 2012. "Sizing Up Repo," CEPR Discussion Papers 8795, C.E.P.R. Discussion Papers.
  4. Antoine Martin & David Skeie & Ernst-Ludwig von Thadden, 2013. "The fragility of short-term secured funding markets," Staff Reports 630, Federal Reserve Bank of New York.
  5. Manconi, Alberto & Massa, Massimo & Yasuda, Ayako, 2012. "The role of institutional investors in propagating the crisis of 2007–2008," Journal of Financial Economics, Elsevier, vol. 104(3), pages 491-518.
  6. Gaetano Antinolfi & Francesca Carapella & Charles Kahn & Antoine Martin & David Mills & Ed Nosal, . "Repos, Fire Sales, and Bankruptcy Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  7. Michael J. Fleming & Warren B. Hrung & Frank M. Keane, 2009. "The Term Securities Lending Facility: origin, design, and effects," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Feb).
  8. 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.
  9. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  10. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 57-95.
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Cited by:
  1. Gaetano Antinolfi & Francesca Carapella & Charles Kahn & Antoine Martin & David Mills & Ed Nosal, . "Repos, Fire Sales, and Bankruptcy Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.

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