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Deleveraging After Lehman; Evidence From Reduced Rehypothecation

Author

Listed:
  • James Aitken
  • Manmohan Singh

Abstract

Rehypothecation is the practice that allows collateral posted by, say, a hedge fund to their prime broker to be used again as collateral by that prime broker for its own funding. In the United Kingdom, such use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets. And moreover, there are no customer protection rules (such as in the United States under the Securities Act of 1933). The paper shows evidence that, following Lehman’s bankruptcy, the extent of rehypothecation has declined substantially, in part because investment firms fear losing collateral if their prime broker becomes insolvent. While less rehypothecation reduces counterparty risk in the system, it also reduces market liquidity.

Suggested Citation

  • James Aitken & Manmohan Singh, 2009. "Deleveraging After Lehman; Evidence From Reduced Rehypothecation," IMF Working Papers 09/42, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/42
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=22785
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    References listed on IDEAS

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    1. Tobias Adrian & Hyun Song Shin, 2009. "Money, Liquidity, and Monetary Policy," American Economic Review, American Economic Association, pages 600-605.
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    Cited by:

    1. Gary Gorton & Andrew Metrick, 2010. "Haircuts," Review, Federal Reserve Bank of St. Louis, pages 507-520.
    2. Lucas Marc Fuhrer & Basil Guggenheim & Silvio Schumacher, 2016. "Re‐Use of Collateral in the Repo Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1169-1193, September.
    3. repec:eee:finsta:v:33:y:2017:i:c:p:311-330 is not listed on IDEAS
    4. Kirk, Adam & McAndrews, James J. & Sastry, Parinitha & Weed, Phillip, 2014. "Matching collateral supply and financing demands in dealer banks," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 127-151.
    5. Aragon, George O. & Strahan, Philip E., 2012. "Hedge funds as liquidity providers: Evidence from the Lehman bankruptcy," Journal of Financial Economics, Elsevier, vol. 103(3), pages 570-587.
    6. George O. Aragon & Philip E. Strahan, 2009. "Hedge Funds as Liquidity Providers: Evidence from the Lehman Bankruptcy," NBER Working Papers 15336, National Bureau of Economic Research, Inc.

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