Working Paper: CEPR ID: DP15782
Authors: Tobias Dieler; Loriano Mancini; Norman Schurhoff
Abstract: Repo markets trade off the efficient allocation of liquidity in the financial sector with resilience to funding shocks. The repo trading and clearing mechanisms are crucial determinants of the allocation-resilience tradeoff. The two common mechanisms, anonymous central-counterparty (CCP) and non-anonymous over-the-counter (OTC) markets, are inefficient and their welfare rankings depend on funding tightness. CCP (OTC) markets inefficiently liquidate high (low) quality assets for large (small) funding shocks. Two innovations to repo market design contribute to maximize welfare: a liquidity-contingent trading mechanism and a two-tiered guarantee fund.
Keywords: repo market; funding run; financial stability; asymmetric information; central clearing; novation; guarantee fund; collateral
JEL Codes: G01; G14; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anonymous versus nonanonymous trading (G19) | funding allocation (I22) |
| anonymous versus nonanonymous trading (G19) | resilience to funding shocks (H12) |
| central clearing counterparties (CCPs) (D53) | systemic runs (E44) |
| central clearing counterparties (CCPs) (D53) | market breakdown (G10) |
| liquidity-contingent trading mechanism (E44) | funding efficiency (I22) |
| two-tiered guarantee fund (G23) | welfare maximization (D69) |
| two-tiered guarantee fund (G23) | lender losses (G21) |
| two-tiered guarantee fund (G23) | collateral transfer to low-quality borrowers (H81) |