Securitized banking and the run on repo pdf files

We discuss policy responses to the crisis and the e ects of the crisis on the real. Loans demand deposits funds lent cash illiquid loans suspended convertibility systemic event banking sector became insolvent provide a new perspective of the contagion in crisis traditional banking 1. The shadow bank run caused the crisis narrative is basically about pointing out that there was a shadow banking sector which didnt rely on funding from individual depositors, that this sector did not have deposit insurance, that as a result it had a bank run, and that we should probably fix that. November, 2009 abstract the panic of 20072008 was a run on the sale and repurchase market the repo market, which. The purpose of this paper is to propose a mechanism for this new kind of bank run and to provide supporting evidence for this mechanism through analysis of two novel. Securitized banking and the run on repo sciencedirect. For newcomers to the repurchase market, its best to first read the about repo tab on the repowatch home page. The repo market is a form of securitized banking that provides critical overnight funding. Securitized banking and repos as money the limits on the amount protected by deposit insurance make bank accounts inadequate for large depositors, such as institutional investors or nonfinancial firms.

Ian sheldon department of agricultural, environmental. An important, emerging literature suggests that the proximate cause of the recent financial crisis was an oldfashioned bank run of the sort that. A traditional banking run is driven by the withdrawal of deposits, while a securitized banking run is driven by the withdrawal of repurchase repo agreements. At the deposit end of the shadow banking system are wholesale investors providers of funds using the repo market and money market. The underbelly of securitized banking is emerging repowatch. The pillar of the shadow banking system is the repo. A failure releases information on banks financial condition or nature of an aggregate shock, triggering runs on banks. Securitized banking, asymmetric information, and financial. The panic of 20072008 was a run on the sale and repurchase market the a.

G1,g19 abstract the panic of 20072008 was a run on the sale and repurchase market the repo market, which is. Role of securitized lending and shadow banking in the 2008. The panic of 20072008 was a run on the sale and repurchase market the repo market, which is a very large, shortterm market that provides. We document that the financial crisis of 20072008 was a repo run in. Repo chains as source of instability impact of repo on money supply rehypothecation. Sizing up repo stanford graduate school of business. The genuine issue was that these toxic assets were utilized by the banks to anchor financing in the repo market. In triparty repo, a clearing bank stands between borrowers and lenders. A traditional banking run is driven by the withdrawal of deposits, a securitized banking run is driven by the withdrawal of repurchase repo agreements. Repo chains and financial instability there are three issues with repos.

What makes this bank run special is that it did not occur in the traditional banking system, but instead took place in the securitized banking system. The purpose of this paper is to propose a mechanism for this new kind of bank run, and to. In a di erenceindi erences setting, we use changes in bilateral repo haircuts to explain. In the shadow banking system aka securitized banking. Gorton and andrew metrick 2009, securitized banking and the run on repo, nber working paper series 15223 cambridge, mass national bureau of economic research, august. These investors and firms need a shortterm, safe, interestbearing place to store money. The underbelly of securitized banking is showing, as investors and traders fight over the scraps left after the financial crisis of 20072008.

New demand for banking a sale and repurchase agreement repo is a deposit of cash. The role of the run on repo in the crisis is discussed in gary b. Regulating systemic risk away sudipto bhattacharya. Securitized banking and the run on repo gary gorton yale and nber andrew metrick yale and nber first version. Securitized banking and the run on repo american economic. Citations of securitized banking and the run on repo. The purpose of this paper is to propose a mechanism for this new kind of bank run, and to provide supporting evidence for this mechanism through analysis of a novel data set. Securitized banking and the run on repo 2012 1043 journal of financial economics 425. The panic of 20072008 was a run on the sale and repurchase market the repo market, which is a very large, shortterm market that provides financing for a wide range of securitization activities and financial institutions. Useful steps forward, but watch the shadowsus economonitor, 1042010 financial crisis driven by run on repo market due to deterioration in certain securitized assets shadow banking ought to be regulated as it is a new form of banking that has same vulnerabilities as. We do not nd support for this 1for the very same reason, interbank deposits are not counted in the calculation of money.

Download citation securitized banking and the run on repo we introduce a new hybrid approach to joint estimation of value at risk var and expected. Securitized lending, asymmetric information, and financial. Because repos are safe for cash lenders, the interest rates are low. Reuse of repo and leverage from collateral shortages and intermediation networks in the precrisis period, financial markets witnessed a growing reliance on shortterm funds raised in wholesale markets. The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day, at a slightly higher price. For example, the rise in interdealer haircuts could indicate a credit. December 1, 2012 securitized banking, which is the name that yale economist gary gorton has given to the combination of repurchase agreements and securitization, was the witches brew that erupted. Pdf the repo market is a major source of shortterm secured funding for financial institutions. Did an invisible run on banks kill the economy the. The run on repo and the feds response gary gortony toomas laaritsz andrew metrickx november 8, 2017 abstract we document that the financial crisis of 20072008 was a repo run in two directions. Consistent with a run on repo, we show that an increase in haircuts on a given type of collateral in the repo market resulted in these assets being brought to the fed as collateral against emergency loans.

Runs on the repurchase agreement repo funding of assetbacked securities were also troublesome for both banks and nonbanks. Securitized banking and the run on repo ideasrepec. The 2007 2008 financial crisis was a framework wide bank run which happened in the securitizedmanaging an account framework and was driven by the withdrawals of a repurchase agreement claessens et al, 2012. We refer to the combination of securitization plus repo finance as securitized banking, and argue that these activities were at the nexus of the crisis. Because the triparty repo market is dominated by regulated institutions, the data there is relatively complete. In fact, a number of studies now support the contention that a repo run was an important component of the gfc. One battle that has gotten media attention is a class action against jp morgan chase, where pension funds that were clients of jp morgan are claiming that officials of the giant bank, up to and including ceo. Repo chains and financial instability viewpoints which. Regulatory arbitrage in repo markets office of financial. Asset pricing, corporate finance, economic fluctuations and growth, monetary economics the panic of 20072008 was a run on the sale and repurchase market the repo market, which is a very large, shortterm market that provides financing for a wide range. The run on repo and the feds response stanford gsb. Securitized banking and the run on repo gary gorton yale and nber andrew metrick. November 9, 2010 abstract the panic of 20072008 was a run on the sale and repurchase market the repo market.

These facilities allowed banks to bring collateral to the fed in. Investment banking, securities dealers, repurchase agreements, triparty repo, bilateral repo, money market mutual. Securitized banking, asymmetric information, and financial crisis. Federal reserve board some reflections on the crisis and. Shadow banking shadow banking, or securitized banking gorton and metrick, 2009 can be thought of. Securitized banking and the run on repo researchgate.

That is, a key channel suggested by the \run on repo theory is that repo drove the growth of the shadow banking sector and the expansion of privately securitized assets prior to the crisis. During the summer of 2008, overnight repo rates were close to the target federal funds rate of 2%. We refer to the combination of securitization plus repo finance as a. See gary gorton and andrew metrick 2012, securitized banking and the run on repo, journal of financial economics, vol. A repurchase agreement, also known as a repo, rp, or sale and repurchase agreement, is a form of shortterm borrowing, mainly in government securities. Securitized banking and the run on repo semantic scholar. Systemic moral hazard and the problem of the twentyfirst century bank run zachary j.