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Repo, Sponsored Repo and Macro-prudential Regulation

Author

Listed:
  • Miguel Fernandes

    (University of Surrey)

  • Mario Pascoa

    (University of Surrey)

Abstract

The repo market played an important role in the 2007-2008 crisis and its aftermath. The “run on repo†started in 2007 when cash lenders withdrew their repo funding due to concerns over securitized mortgages as collateral and haircuts rose dramatically as described in Gorton and Metrick (2012). The combination of very large, unprecedented haircuts with declining asset values, helped fuel the insolvency problems in the banking sector, which would eventually lead to massive bailouts throughout 2008 and the bankruptcy of some major banks. In the following years, the repo market recovered most of its influence and size, but the Basel III regulations that were imposed to prevent future banking crises and limit leverage would create new frictions in the repo market. The “leverage ratio†in particular has perverse effect on the repo markets. The “leverage ratio†demands that banks hold Tier 1 capital as a percentage of their total assets.

Suggested Citation

  • Miguel Fernandes & Mario Pascoa, 2024. "Repo, Sponsored Repo and Macro-prudential Regulation," School of Economics Discussion Papers 0224, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0224
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    File URL: https://repec.som.surrey.ac.uk/2024/DP02-24.pdf
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    References listed on IDEAS

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