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Repos, Fire Sales, and Bankruptcy Policy

Listed author(s):
  • 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)

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)

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File URL: http://dx.doi.org/10.1016/j.red.2014.06.002
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 18 (2015)
Issue (Month): 1 (January)
Pages: 21-31

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Handle: RePEc:red:issued:14-31
DOI: 10.1016/j.red.2014.06.002
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  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, 07.
  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.
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