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Collateral Runs

Author

Listed:
  • Sebastian Infante
  • Alexandros P Vardoulakis

Abstract

This paper models an unexplored source of liquidity risk large broker-dealers face: a withdrawal of collateral providers. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities among collateral providers, reducing a dealer’s liquidity position and compromising their solvency. Collateral runs are triggered by a contraction in dealers’ assets making them markedly different than traditional wholesale funding runs. Mitigating these risks involves different policy recommendations.

Suggested Citation

  • Sebastian Infante & Alexandros P Vardoulakis, 2021. "Collateral Runs," The Review of Financial Studies, Society for Financial Studies, vol. 34(6), pages 2949-2992.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:6:p:2949-2992.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa139
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    Citations

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    Cited by:

    1. Justus Inhoffen & Iman van Lelyveld, 2023. "Safe Asset Scarcity and Re-use in the European Repo Market," Discussion Papers of DIW Berlin 2050, DIW Berlin, German Institute for Economic Research.
    2. Justus Inhoffen & Iman van Lelyveld, 2023. "Safe Asset Scarcity and Re-use in the European Repo Market," Working Papers 787, DNB.

    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G01 - Financial Economics - - General - - - Financial Crises
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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