Repos, fire sales, and bankruptcy policy
The events from the 2007–09 financial crisis have raised concerns that the failure of large financial institutions can lead to destabilizing fire sales of assets. The risk of fire sales is related to exemptions from bankruptcy's automatic stay provision enjoyed by a number of financial contracts, such as repo. An automatic stay prohibits collection actions by creditors against a bankrupt debtor or his property. It prevents a creditor from liquidating collateral of a defaulting debtor, since collateral is a lien on the debtor's property. In this paper, we construct a model of repo transactions, and consider the effects of changing the bankruptcy rule regarding the automatic stay on the activity in repo and real investment markets. We find that exempting repos from the automatic stay is beneficial for creditors who hold the borrowers' collateral. Although the exemption may increase the size of the repo market by enhancing the liquidity of collateral, it can also lead to subsequent damaging fire sales that are associated with reductions in real investment activity. Hence, policymakers face a trade-off between the benefits of investment activity and the benefits of liquid markets for collateral..
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
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.:
- Guido Lorenzoni, 2007.
"Inefficient Credit Booms,"
NBER Working Papers
13639, National Bureau of Economic Research, Inc.
- Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2012.
"Repo and securities lending,"
529, Federal Reserve Bank of New York.
- 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.
- Gary B. Gorton & Andrew Metrick, 2009.
"Securitized Banking and the Run on Repo,"
NBER Working Papers
15223, National Bureau of Economic Research, Inc.
- Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
- Gary Gorton & Andrew Metrick, 2010. "Securitized Banking and the Run on Repo," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
- James McAndrews & William Roberds, 1999.
"Payment intermediation and the origins of banking,"
85, Federal Reserve Bank of New York.
- Kenneth French & Martin Baily & John Campbell & John Cochrane & Douglas Diamond & Darrell Duffie & Anil Kashyap & Frederic Mishkin & Raghuram Rajan & David Scharfstein & Robert Shiller & Hyun Song Shi, 2010. "The Squam Lake Report: Fixing the Financial System," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(3), pages 8-21.
- Shimer Robert & Smith Lones, 2001. "Matching, Search, and Heterogeneity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-18, April.
- Brian Begalle & Antoine Martin & James McAndrews & Susan McLaughlin, 2013. "The risk of fire sales in the tri-party repo market," Staff Reports 616, Federal Reserve Bank of New York.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-2012-15. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If references are entirely missing, you can add them using this form.