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Collateral Runs

Author

Listed:
  • Sebastian Infante
  • Alexandros Vardoulakis

Abstract

This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. 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 for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than traditional wholesale funding runs because they are triggered by a contraction in dealers' assets, rather than their liabilities.

Suggested Citation

  • Sebastian Infante & Alexandros Vardoulakis, 2018. "Collateral Runs," Finance and Economics Discussion Series 2018-022, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2018-22
    DOI: 10.17016/FEDS.2018.022
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    File URL: https://www.federalreserve.gov/econres/feds/files/2018022pap.pdf
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    References listed on IDEAS

    as
    1. Douglas W. Diamond & Raghuram G. Rajan, 2011. "Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 557-591.
    2. Toni Ahnert, 2016. "Rollover Risk, Liquidity and Macroprudential Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1753-1785, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Dealer; Collateral; Default; Liquidity; Rehypothecation; Repo; Runs;

    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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