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Repo Runs

Author

Listed:
  • Martin, A.
  • Skeie, D.
  • von Thadden, E.L.

Abstract

This paper develops a model of financial institutions that borrow short- term and invest into long-term marketable assets. Because these financial intermediaries perform maturity transformation, they are subject to runs. We endogenize the profits of the 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 the case where 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 becomes less likely the more intermediaries are facing problems. In the limit, in case of a general market run, 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.

Suggested Citation

  • Martin, A. & Skeie, D. & von Thadden, E.L., 2010. "Repo Runs," Discussion Paper 2010-44S, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:e14f6c26-c077-46fb-92a8-86d603625a7f
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    File URL: https://pure.uvt.nl/portal/files/1218445/2010-13S.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Investment banking; securities dealers; repurchase agreements; tri-party repo; runs; financial fragility;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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