Securitized banking and the run on repo pdf files

Securitized banking and the run on repo researchgate. Role of securitized lending and shadow banking in the 2008. Runs on the repurchase agreement repo funding of assetbacked securities were also troublesome for both banks and nonbanks. Systemic moral hazard and the problem of the twentyfirst century bank run zachary j. 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. Pdf the repo market is a major source of shortterm secured funding for financial institutions. 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. For example, the rise in interdealer haircuts could indicate a credit. In a di erenceindi erences setting, we use changes in bilateral repo haircuts to explain. In fact, a number of studies now support the contention that a repo run was an important component of the gfc. 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. 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. The repo market is a form of securitized banking that provides critical overnight funding.

A repurchase agreement, also known as a repo, rp, or sale and repurchase agreement, is a form of shortterm borrowing, mainly in government securities. The purpose of this paper is to propose a mechanism for this new kind of bank run, and to. Investment banking, securities dealers, repurchase agreements, triparty repo, bilateral repo, money market mutual. The role of securitized lending and shadow banking in the 2008 financial crisis essay debora dyankova student number. Because repos are safe for cash lenders, the interest rates are low. Securitized banking and the run on repo 2012 1043 journal of financial economics 425. For newcomers to the repurchase market, its best to first read the about repo tab on the repowatch home page.

Shadow banking shadow banking, or securitized banking gorton and metrick, 2009 can be thought of. We discuss policy responses to the crisis and the e ects of the crisis on the real. Repo chains and financial instability there are three issues with repos. Repo transactions are collateralized, frequently with securitized bonds. 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. Repo chains and financial instability viewpoints which. On the repo markets, see securities industry and financial markets. Securitized banking and the run on repo american economic. Securitized banking and the run on repo, journal of financial economics, elsevier, vol. The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day, at a slightly higher price. In the shadow banking system aka securitized banking. See gary gorton and andrew metrick 2012, securitized banking and the run on repo, journal of financial economics, vol. 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. 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.

Because the triparty repo market is dominated by regulated institutions, the data there is relatively complete. The role of the run on repo in the crisis is discussed in gary b. Securitized banking and the run on repo gary gorton yale and nber andrew metrick. 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. Depositors panic and run indiscriminately on their banks. Securitized banking, asymmetric information, and financial crisis. Securitized banking, or, the shadow banking system the need for lowrisk secure, shortterm lending between giant financial institutions gave rise to what is called the shadow banking system, also known as the parallel banking system. 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. Regulatory arbitrage in repo markets office of financial. Citations of securitized banking and the run on repo. An important, emerging literature suggests that the proximate cause of the recent financial crisis was an oldfashioned bank run of the sort that. These facilities allowed banks to bring collateral to the fed in. Securitized banking, asymmetric information, and financial. 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.

Securitized banking and the run on repo semantic scholar. We document that the financial crisis of 20072008 was a repo run in. New demand for banking a sale and repurchase agreement repo is a deposit of cash. The underbelly of securitized banking is showing, as investors and traders fight over the scraps left after the financial crisis of 20072008. 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. Regulating systemic risk away sudipto bhattacharya.

These investors and firms need a shortterm, safe, interestbearing place to store money. Ian sheldon department of agricultural, environmental. 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. The genuine issue was that these toxic assets were utilized by the banks to anchor financing in the repo market. 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. We refer to the combination of securitization plus repo finance as a. Provided the asset being used as collateral is liquid, the buyer should be able to refinance himself at any time during the life of a repo by selling or repoing the assets to a third party he would, of course, subsequently have to buy the same or a similar asset back in order to return it to his repo counterparty at the end of the repo. Sizing up repo stanford graduate school of business. The panic of 20072008 was a run on the sale and repurchase market the a.

Repo chains as source of instability impact of repo on money supply rehypothecation. 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. 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. We do not nd support for this 1for the very same reason, interbank deposits are not counted in the calculation of money. A traditional banking run is driven by the withdrawal of deposits, a securitized banking run is driven by the withdrawal of repurchase repo agreements. In triparty repo, a clearing bank stands between borrowers and lenders. November 9, 2010 abstract the panic of 20072008 was a run on the sale and repurchase market the repo market. The pillar of the shadow banking system is the repo. Did an invisible run on banks kill the economy the. Gorton and metrick 2009 characterized the global financial crisis as a systemwide run in the securitized banking systemmore precisely a run on the repo marketsimilar to the banking panics. 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 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.

The underbelly of securitized banking is emerging repowatch. 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 ideasrepec. A failure releases information on banks financial condition or nature of an aggregate shock, triggering runs on banks. 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. The net result was a shortage of funding liquidity that caused significant stress to the financial system in late2007. 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 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. During the summer of 2008, overnight repo rates were close to the target federal funds rate of 2%. The run on repo and the feds response stanford gsb.