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Emergency Collateral Upgrades

Author

Listed:
  • Mark A. Carlson
  • Marco Macchiavelli

Abstract

During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid inventories (avoiding potential fire-sales), and to extend funding to their clients. Exogenous variation in collateral policies at one facility allows a causal interpretation of these stabilizing effects.

Suggested Citation

  • Mark A. Carlson & Marco Macchiavelli, 2018. "Emergency Collateral Upgrades," Finance and Economics Discussion Series 2018-078, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2018-78
    DOI: 10.17016/FEDS.2018.078
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    File URL: https://www.federalreserve.gov/econres/feds/files/2018078pap.pdf
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    References listed on IDEAS

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    1. Armantier, Olivier & Ghysels, Eric & Sarkar, Asani & Shrader, Jeffrey, 2015. "Discount window stigma during the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 118(2), pages 317-335.
    2. Michael J. Fleming, 2012. "Federal Reserve Liquidity Provision during the Financial Crisis of 2007–2009," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 161-177, October.
    3. Rajkamal Iyer & Marco Macchiavelli, 2017. "The Systemic Nature of Settlement Fails," FEDS Notes 2017-07-03, Board of Governors of the Federal Reserve System (U.S.).
    4. repec:fip:fednep:00045 is not listed on IDEAS
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    6. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    7. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
    8. Rajkamal Iyer & Marco Macchiavelli, 2017. "Primary Dealers' Behavior during the 2007-08 Crisis : Part II, Intermediation and Deleveraging," FEDS Notes 2017-06-28, Board of Governors of the Federal Reserve System (U.S.).
    9. Acharya, Viral V. & Fleming, Michael J. & Hrung, Warren B. & Sarkar, Asani, 2017. "Dealer financial conditions and lender-of-last-resort facilities," Journal of Financial Economics, Elsevier, vol. 123(1), pages 81-107.
    10. Michael J. Fleming & Warren B. Hrung & Frank M. Keane, 2010. "Repo Market Effects of the Term Securities Lending Facility," American Economic Review, American Economic Association, vol. 100(2), pages 591-596, May.
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    15. Arvind Krishnamurthy, 2010. "How Debt Markets Have Malfunctioned in the Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 3-28, Winter.
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    More about this item

    Keywords

    Financial crisis ; Lender of last resort ; Collateral ; Dealers ; Repo;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G01 - Financial Economics - - General - - - Financial Crises
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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