Working Paper: CEPR ID: DP8795
Authors: Arvind Krishnamurthy; Stefan Nagel; Dmitry Orlov
Abstract: We measure the repo funding extended by money market funds (MMF) and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates by type of underlying collateral. We find that repo played only a small role in funding private sector assets prior to the crisis, as most repos are backed by Treasury and Agency collateral. Repo with private sector collateral contracts during the crisis, but the magnitude is relatively insignificant compared with the contraction in asset-backed commercial paper (ABCP). While relatively small in aggregate, the contraction in repo particularly affected key dealer banks with large exposures to private sector securities, which then had knock-on effects on security markets, and led these dealer banks to resort to the Fed's emergency lending programs. We also find that haircuts in MMF-to-dealer repo rise less than the dealer-to-dealer or dealer-to-hedge fund repo haircuts reported in earlier papers. This finding suggests that the contraction in repo led dealers to take defensive actions, given their own capital and liquidity problems, raising credit terms to their borrowers. The picture that emerges from these findings looks less like a traditional bank run of depositors and more like a credit crunch among dealer banks.
Keywords: dealer banks; financial crisis; repurchase agreements; shadow banking
JEL Codes: E51; G01; G21; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| repo funding (E52) | financing private sector assets (G32) |
| repo funding contraction (E51) | liquidity issues for dealer banks (G21) |
| repo funding contraction (E51) | credit crunch among dealer banks (G21) |
| repo funding for private-label ABS collapse (G33) | unwillingness of MMFs to lend against risky collateral (E44) |
| repo funding contraction (E51) | cascading effects on security markets (G10) |
| repo funding contraction (E51) | defensive actions raising credit terms to borrowers (G21) |
| contraction in repo funding (G21) | less impact compared to contraction in ABCP (F65) |