Working Paper: NBER ID: w17768
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: repo; shadow banking; financial crisis; money market funds; securities lenders
JEL Codes: G01; G21; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| repo played a small role in funding private sector assets prior to the crisis (G21) | growth in repo did not significantly drive the expansion of privately securitized assets (G19) |
| repo with private sector collateral contracted (F34) | magnitude of this contraction was relatively insignificant compared to the contraction in ABCP (F65) |
| contraction in repo funding (G21) | defensive actions by dealers due to their capital and liquidity issues (G28) |
| behavior of money market funds and securities lenders during the crisis (E44) | resembled a credit crunch rather than a traditional bank run (E44) |
| haircuts in money market fund-to-dealer repo rose less than dealer-to-dealer or dealer-to-hedge fund repo haircuts (G21) | contraction in repo led to defensive actions by dealers (E44) |