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Repos, Fire Sales, and Bankruptcy Policy

Author

Listed:
  • Gaetano Antinolfi

    (Washington University)

  • Francesca Carapella

    (Federal Reserve Board)

  • Charles Kahn

    (University of Illinois, Urbana-Champaign)

  • Antoine Martin

    (Federal Reserve Bank of New York)

  • David Mills

    (Federal Reserve Board)

  • Ed Nosal

    (Federal Reserve Bank of Chicago)

Abstract

This paper studies the optimal bankruptcy policy for repurchase agreements (repos) with respect to their exemption from the automatic stay of bankruptcy. The exemption from automatic stay has been one of the key contributors to the development of the repo market as a major source of funding for many financial market participants. At the same time the exemption has raised concerns that the default of a large institution could cause externalities on other markets, in the form of fire-sales. We find that exempting repos from the automatic stay may increase the size of the repo market by enhancing the liquidity of collateral, but it can cause fire sales that are associated with reductions in real investment. Hence, policy makers face a trade-off between the benefits of investment activity and the benefits of liquid repo markets. (Copyright: Elsevier)

Suggested Citation

  • Gaetano Antinolfi & Francesca Carapella & Charles Kahn & Antoine Martin & David Mills & Ed Nosal, 2015. "Repos, Fire Sales, and Bankruptcy Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 21-31, January.
  • Handle: RePEc:red:issued:14-31
    DOI: 10.1016/j.red.2014.06.002
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    References listed on IDEAS

    as
    1. James J. McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York.
    2. Kenneth R. French & Martin N. Baily & John Y. Campbell & John H. Cochrane & Douglas W. Diamond & Darrell Duffie & Anil K Kashyap & Frederic S. Mishkin & Raghuram G. Rajan & David S. Scharfstein & Robe, 2010. "The Squam Lake Report: Fixing the Financial System," Economics Books, Princeton University Press, edition 1, number 9261.
    3. Brian Begalle & Antoine Martin & James McAndrews & Susan McLaughlin, 2016. "The Risk Of Fire Sales In The Tri-Party Repo Market," Contemporary Economic Policy, Western Economic Association International, vol. 34(3), pages 513-530, July.
    4. Shimer Robert & Smith Lones, 2001. "Matching, Search, and Heterogeneity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-18, April.
    5. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    6. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
    7. Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2013. "Repo and Securities Lending," NBER Chapters,in: Risk Topography: Systemic Risk and Macro Modeling, pages 131-148 National Bureau of Economic Research, Inc.
    8. repec:hrv:faseco:33077925 is not listed on IDEAS
    9. Darrell Duffie & David A. Skeel, 2012. "A Dialogue on the Costs and Benefits of Automatic Stays for Derivatives and Repurchase Agreements," Book Chapters,in: Kenneth E. Scott & John B. Taylor (ed.), Bankruptcy Not Bailout, chapter 5 Hoover Institution, Stanford University.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Sebastian Infante, 2013. "Repo collateral fire sales: the effects of exemption from automatic stay," Finance and Economics Discussion Series 2013-83, Board of Governors of the Federal Reserve System (U.S.).
    2. Brian Begalle & Antoine Martin & James McAndrews & Susan McLaughlin, 2016. "The Risk Of Fire Sales In The Tri-Party Repo Market," Contemporary Economic Policy, Western Economic Association International, vol. 34(3), pages 513-530, July.
    3. Donaldson, Jason & Micheler, Eva, 2016. "Resaleable debt and systemic risk," LSE Research Online Documents on Economics 66042, London School of Economics and Political Science, LSE Library.
    4. Song Han & Kleopatra Nikolaou, 2016. "Trading Relationships in the OTC Market for Secured Claims : Evidence from Triparty Repos," Finance and Economics Discussion Series 2016-064, Board of Governors of the Federal Reserve System (U.S.).
    5. Hajime Tomura, 2016. "Investment Horizon and Repo in the Over‐the‐Counter Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 145-164, February.
    6. Clemens Jobst & Kilian Rieder, 2016. "Principles, circumstances and constraints: the Nationalbank as lender of last resort from 1816 to 1931," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 140-162.
    7. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    8. Vincent Maurin & Cyril Monnet & Piero Gottardi, 2016. "A Theory of Repurchase Agreement, Collateral Re-use, and Repo Intermediation," 2016 Meeting Papers 417, Society for Economic Dynamics.
    9. repec:eee:jfinec:v:127:y:2018:i:3:p:485-504 is not listed on IDEAS
    10. Hajime Tomura, 2014. "Investment Horizon and Repo in the Over-the-Counter Market," UTokyo Price Project Working Paper Series 026, University of Tokyo, Graduate School of Economics.
    11. Yumi Saita & Chihiro Shimizu & Tsutomu Watanabe, 2013. "Aging and Real Estate Prices:Evidence from Japanese and US Regional Data," UTokyo Price Project Working Paper Series 014, University of Tokyo, Graduate School of Economics, revised Dec 2013.

    More about this item

    Keywords

    Repos; Fire sales; Bankruptcy;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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