Working Paper: NBER ID: w18455
Authors: Gary B. Gorton; Andrew Metrick
Abstract: The sale and repurchase (repo) market played a central role in the recent financial crisis. From the second quarter of 2007 to the first quarter of 2009, net repo financing provided to U.S. banks and broker-dealers fell by about $1.3 trillion - more than half of its pre-crisis total. Significant details of this "run on repo" remain shrouded, however, because many of the providers of repo finance are lightly regulated or unregulated cash pools. In this paper we supplement the best available official data sources with a unique market survey to provide an updated picture of the dynamics of the repo run. We provide evidence that the run was predominantly driven by the flight of foreign financial institutions, domestic and offshore hedge funds, and other unregulated cash pools. Our analysis highlights the danger of relying exclusively on data from regulated institutions, which would miss the most important parts of the run.
Keywords: repo market; financial crisis; hedge funds; unregulated cash pools
JEL Codes: G01; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| run on repo financing (G21) | financial crisis (G01) |
| flight of foreign financial institutions and unregulated cash pools (F65) | decline in repo financing (G32) |
| discrepancy between reported assets and liabilities (G32) | analysis of repo market (E44) |
| focus on regulated institutions (G28) | misleading understanding of repo market (E43) |
| reliance on data from regulated institutions (G28) | missing crucial aspects of repo run (E44) |