Repo, Sponsored Repo and Macro-prudential Regulation

Miguel Fernandes and Mario Pascoa
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Miguel Fernandes: University of Surrey
Mario Pascoa: University of Surrey

No 224, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: The repo market played an important role in the 2007-2008 crisis and its aftermath. The “run on repo†started in 2007 when cash lenders withdrew their repo funding due to concerns over securitized mortgages as collateral and haircuts rose dramatically as described in Gorton and Metrick (2012). The combination of very large, unprecedented haircuts with declining asset values, helped fuel the insolvency problems in the banking sector, which would eventually lead to massive bailouts throughout 2008 and the bankruptcy of some major banks. In the following years, the repo market recovered most of its influence and size, but the Basel III regulations that were imposed to prevent future banking crises and limit leverage would create new frictions in the repo market. The “leverage ratio†in particular has perverse effect on the repo markets. The “leverage ratio†demands that banks hold Tier 1 capital as a percentage of their total assets.

Pages: 29 pages
Date: 2024-02
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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