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Repo runs

Listed author(s):
  • Antoine Martin
  • David R. Skeie
  • Ernst-Ludwig Von Thadden

This paper develops a model of financial institutions that borrow short-term and invest in long-term marketable assets. Because these financial intermediaries perform maturity transformation, they may be vulnerable to runs. We endogenize the profits of an intermediary and derive distinct liquidity and solvency conditions that determine whether a run can be prevented. We first characterize these conditions for an isolated intermediary and then generalize them to cases in which the intermediary can sell assets to prevent runs. The sale of assets can eliminate runs if the intermediary is solvent but illiquid. However, because of cash-in-the-market pricing, this possibility becomes less likely as more intermediaries face problems. In the limit, if a general market run occurs, no intermediary can sell assets to forestall a run, and our original solvency and liquidity constraints are again relevant for the stability of financial institutions.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 444.

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Date of creation: 2010
Handle: RePEc:fip:fednsr:444
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  1. Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2014. "Sizing Up Repo," Journal of Finance, American Finance Association, vol. 69(6), pages 2381-2417, December.
  2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  3. Antoine Martin, 2006. "Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 197-211, 05.
  4. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2011. "Outside and Inside Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 259-321.
  5. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  6. Daniel Covitz & Nellie Liang & Gustavo A. Suarez, 2013. "The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market," Journal of Finance, American Finance Association, vol. 68(3), pages 815-848, 06.
  7. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 1-41.
  8. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
  9. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
  10. Bhattacharya, Sudipto & Padilla, A Jorge, 1996. "Dynamic Banking: A Reconsideration," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 1003-1032.
  11. Darrell Duffie, 2010. "The Failure Mechanics of Dealer Banks," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 51-72, Winter.
  12. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
  13. repec:fip:fedgsq:y:2009:x:6 is not listed on IDEAS
  14. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  15. Daniel M. Covitz & J. Nellie Liang & Gustavo A. Suarez, 2009. "The evolution of a financial crisis: panic in the asset-backed commercial paper market," Finance and Economics Discussion Series 2009-36, Board of Governors of the Federal Reserve System (U.S.).
  16. Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013. "Securitization without risk transfer," Journal of Financial Economics, Elsevier, vol. 107(3), pages 515-536.
  17. Bhattacharya, Sudipto & Boot, Arnoud W A & Thakor, Anjan V, 1998. "The Economics of Bank Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 745-770, November.
  18. David R. Skeie, 2004. "Money and Modern Bank Runs," 2004 Meeting Papers 785, Society for Economic Dynamics.
  19. Ernst-Ludwig von Thadden & Erik Berglöf & Gérard Roland, 2010. "The Design of Corporate Debt Structure and Bankruptcy," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2648-2679, July.
  20. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-955, September.
  21. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
  22. Jeremy C. Stein, 2011. "Monetary Policy as Financial-Stability Regulation," NBER Working Papers 16883, National Bureau of Economic Research, Inc.
  23. S. Viswanathan & Adriano A. Rampini, 2010. "Financial Intermediary Capital," 2010 Meeting Papers 1071, Society for Economic Dynamics.
  24. Adam Copeland & Antoine Martin & Michael Walker, 2010. "The tri-party repo market before the 2010 reforms," Staff Reports 477, Federal Reserve Bank of New York.
  25. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
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