Repo Runs

A. Martin, D. Skeie, E.L. von Thadden

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    Abstract

    This paper develops a model of financial institutions that borrow short- term and invest into long-term marketable assets. Because these financial intermediaries perform maturity transformation, they are subject to runs. We endogenize the profits of the intermediary and derive distinct liquidity and solvency conditions that determine whether a run can be prevented. We first characterize these conditions for an isolated intermediary and then generalize them to the case where the intermediary can sell assets to prevent runs. The sale of assets can eliminate runs if the intermediary is solvent but illiquid. However, because of cash-in-the-market pricing, this becomes less likely the more intermediaries are facing problems. In the limit, in case of a general market run, no intermediary can sell assets to forestall a run, and our original solvency and liquidity constraints are again relevant for the stability of financial institutions.
    Original languageEnglish
    Place of PublicationTilburg
    PublisherFinance
    Number of pages35
    Volume2010-44S
    Publication statusPublished - 2010

    Publication series

    NameCentER Discussion Paper
    Volume2010-44S

    Keywords

    • Investment banking
    • securities dealers
    • repurchase agreements
    • tri-party repo
    • runs
    • financial fragility

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  • Cite this

    Martin, A., Skeie, D., & von Thadden, E. L. (2010). Repo Runs. (CentER Discussion Paper; Vol. 2010-44S). Finance.