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Securitized Banking and the Run on Repo

In: Market Institutions and Financial Market Risk

Author Info

Listed author(s):
  • Gary Gorton
  • Andrew Metrick

Abstract

The Panic of 2007-2008 was a run on the sale and repurchase market (the “repo†market), which is a very large, short-term market that provides financing for a wide range of securitization activities and financial institutions. Repo transactions are collateralized, frequently with securitized bonds. We refer to the combination of securitization plus repo finance as “securitized banking†, and argue that these activities were at the nexus of the crisis. We use a novel data set that includes credit spreads for hundreds of securitized bonds to trace the path of crisis from subprime-housing related assets into markets that had no connection to housing. We find that changes in the “LIB-OIS†spread, a proxy for counterparty risk, was strongly correlated with changes in credit spreads and repo rates for securitized bonds. These changes implied higher uncertainty about bank solvency and lower values for repo collateral. Concerns about the liquidity of markets for the bonds used as collateral led to increases in repo “haircuts†: the amount of collateral required for any given transaction. With declining asset values and increasing haircuts, the U.S. banking system was effectively insolvent for the first time since the Great Depression.

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This chapter was published in:
  • Mark Carey & Anil Kashyap & Raghuram Rajan & René Stulz, 2012. "Market Institutions and Financial Market Risk," NBER Books, National Bureau of Economic Research, Inc, number care10-1, October.
    • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 13173.
    Handle: RePEc:nbr:nberch:13173
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    Find related papers by JEL classification:
    • E0 - Macroeconomics and Monetary Economics - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Bank Assets and Bank Runs
      by Jonathan Finegold in Economic Thought on 2014-02-26 19:57:43
    2. Interview with Narayana Kocherlakota
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-02-01 12:08:24
    3. Can Margin Requirements Improve Financial Resilience?
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-01-25 17:55:46
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