Working Paper: NBER ID: w24866
Authors: Gary Gorton; Toomas Laarits; Andrew Metrick
Abstract: The Financial Crisis began and accelerated in short-term money markets. One such market is the multi-trillion dollar sale-and-repurchase (“repo”) market, where prices show strong reactions during the crisis. The academic literature and policy community remain unsettled about the role of repo runs, because detailed data on repo quantities is not available. We provide quantity evidence of the run on repo through an examination of the collateral brought to emergency liquidity facilities of the Federal Reserve. We show that the magnitude of repo discounts (“haircuts”) on specific collateral is related to the likelihood of that collateral being brought to Fed facilities.
Keywords: repo market; financial crisis; emergency lending; haircuts; collateral
JEL Codes: E32; E44; E58; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in haircuts for specific types of collateral in the repo market (E44) | increase in the amount of that collateral being pledged at Federal Reserve emergency lending facilities (E51) |
| increase in haircuts (E39) | decrease in the quantity of securitized borrowing available (F65) |
| increase in haircuts (E39) | mimic a traditional bank run (E44) |
| increase in haircuts (E39) | increase in borrowing from the Fed's emergency facilities (F65) |