Sizing Up Repo

To understand which short‐term debt markets experienced “runs” during the financial crisis, we analyze a novel data set of repurchase agreements (repo), that is, loans between nonbank cash lenders and dealer banks collateralized with securities. Consistent with a run, repo volume backed by private asset‐backed securities falls to near zero in the crisis. However, the reduction is only $182 billion, which is small relative to the stock of private asset‐backed securities as well as the contraction in asset‐backed commercial paper. While the repo contraction is small in aggregate, it disproportionately affected a few dealer banks.     

Re‐Use of Collateral in the Repo Market

This paper introduces a methodology to estimate the re‐use of collateral based on actual transaction data. With a comprehensive data set from the Swiss franc repo market we are able to provide the first systematic study on the re‐use of collateral. We find that re‐using collateral was most popular prior to the financial crisis when roughly 10% of the outstanding interbank volume was secured with re‐used collateral. Furthermore, we show that the re‐use of collateral increases with the scarcity of collateral. By giving an estimate of the collateral re‐use and explaining its drivers, the paper contributes to the on‐going debate on collateral availability.     

金融危机后欧美回购市场的发展及借鉴意义

受2008年全球金融危机和其后欧债危机的影响,欧美回购市场出现了一些新的趋势和特征,如短期融资渠道由无担保的信用拆借市场向有担保的回购市场转移,三方回购和自动交易系统交易占比稳步上升等。与欧美市场相比,我国回购市场起步较晚,在规模、交易后处理、抵押品管理以及交易工具等方面存在自身特点。文章对我国银行间回购市场的发展现状和不足进行了总结,并对照欧美回购市场发展的经验和教训,提出了改善我国银行间回购市场流动性、促进交易活跃度的建议。     

Statement of the Financial Economists Roundtable: How to Manage and Help to Avoid Systemic Liquidity Risk

In the summer of 2010, when legislative and regulatory responses were being finalized to address financial institution and market liquidity problems, the Financial Economists Roundtable, a group of prominent financial economists over 50 years old, convened with the aim of developing principles that would address both market‐wide and institution‐specific liquidity problems exposed by the 2007–2008 financial crisis. As summarized in this statement, the eight principles that came out of this meeting should be used to assess the strengths and weakness of not only the Dodd‐Frank legislation that was passed, but also of the regulatory proposals to implement the law as they continue to emerge. Among the eight principles endorsed, the Roundtable urges regulators to seek to ensure that:

• ? the failures of large complex institutions are independent events so as to minimize spillover effects;
• ? the interdependence of capital and liquidity requirements is recognized;
• ? such requirements are flexible and cost‐effective;
• ? central banks continue to provide lender‐of‐last‐resort lending against sound collateral; and
• ? the disclosure of institutions' risk exposures is timely and transparent.

The Roundtable also concluded that the crisis revealed critical weaknesses in the tri‐party repo market, and recommended consideration of reforms to the market that include moving such transactions to organized exchanges, and reducing dependence on the two private sector financial institutions that operate that market's infrastructure. Additional useful reforms would include limiting daylight overdrafts, imposing margin requirements on counterparties to limit systemic risk and prohibiting re‐hypothecation. Finally, the Roundtable believes that improved transparency of transactions and prices would enhance monitoring by responsible regulatory agencies.     

金融危机背景下国际回购市场的最新发展及其对我国的启示

一个国家或地区的回购市场健全成熟与否对于防范流动性危机至关重要。通过分析本次金融危机对国际回购市场的影响以及各国的应对措施,结合我国银行间回购市场的实际情况研究认为,有必要在我国银行间回购市场引入CCP清算和回购第三方服务,它们在危机时刻能够有效降低回购市场的整体信用风险,维持市场流动性。同时,还应该妥当协调抵押品变现问题,提高抵押品的利用率,以及建立应对金融危机的回购市场监管应急预案。     

Special Repo Rates

This article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements. A repo rate is, in effect, an interest rate on loans collateralized by a specific instrument. A “special” is a repo rate significantly below prevailing market riskless interest rates. This article shows that specials can occur when those owning the collateral are inhibited, whether from legal or institutional requirements or from frictional costs, from supplying collateral into repurchase agreements. Specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials.     

Repo Auctions and the Market for Liquidity

What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short‐term rates. However, auction allocations affect banks' subsequent behavior in a way that is consistent with a degree of allocational and operational inefficiency. Also, large bidders appear to have better access to the interbank market than small ones. Finally, the evidence suggests that the ECB uses collateral haircuts that do not equilibrate opportunity costs.     

Investment Horizon and Repo in the Over‐the‐Counter Market

This paper presents a three‐period model featuring a short‐term investor in the over‐the‐counter bond market. A short‐term investor stores cash because of a need to pay cash at some future date. If a short‐term investor buys bonds, then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market. Ex‐ante, this hold‐up problem explains the use of a repo by a short‐term investor, the existence of a haircut, and the vulnerability of a repo market to counterparty risk. This result holds without any uncertainty about bond returns or asymmetric information.     

Money Market Reform in Korea and Its Effects on the Overnight Call–Repurchase Agreement Rate

The Korean government implemented money market reform after the global financial crisis, aiming to develop the repurchase agreement (RP, repo) market. In this article, I analyze the reform and its effects on money markets. Results show that the reform strengthened the functionality of the RP market and the monetary policy transmission channel to it. The error correction model indicates that although the adjustments to the equilibrium occurred through the call rate during the global financial crisis, they were processed through the RP rate in later periods. The ability of the RP rate to inform market liquidity conditions has improved.     

美联储货币政策与回购操作

该文在分析美国回购市场的基础上,对美联储回购／逆回购货币政策工具进行了详细分析。2008年金融危机以前,回购和逆回购仅是美联储临时性政策工具,总体交易规模很小。实证结果表明,金融危机后国债隔夜回购的市场交易利率能预测美联储国债隔夜回购利率变动,且美联储的国债隔夜回购利率相对更高。2013年8月,美联储推出隔夜固定利率全额（给定额度内）供应逆回购工具,为将来美联储退出QE过程做准备。2013年最后两个交易日,该工具操作规模分别约为1000亿美元和2000亿美元,引发市场关注。     

基于我国国债回购市场的利率预期理论检验

本文在给出利率期限结构预期假说的定义及其推论的基础上，利用单位根和协整检验方法对上交所国债回购市场的利率数据进行了检验，结果表明国债回购利率序列均为一阶单整，由各个国债回购利率所构成的利率系统仅由一个共同的随机趋势驱动，因此得出利率预期假说在我国国债回购市场是有效的结论。本文利用向量误差修正模型对各个国债回购利率的估计结果进一步验证了这一点。     

The global financial crisis and stock market migrations: An analysis of family and non-family firms in Germany

In most European countries, the number of exchange-listed firms has begun declining subsequent to the global financial crisis in 2008/2009. In the U.S., these numbers had already started to decrease one decade earlier. We investigate how the global financial crisis encouraged family and non-family firms in Germany to transfer from the highest to a lower stock market segment. Using logit and firm-fixed effects regressions, we provide several explanations why we observe a higher propensity of family firms relative to non-family firms to migrate to a lower market segment subsequent to the financial crisis. Explanations are lower investments during the financial crisis, decreasing growth opportunities and operating performance as well as lower stock market quality. Consequently, many family firms reassessed their listing benefits and costs after the financial crisis as well as their initial market segment decision. In contrast, the transfer reasons for non-family firms are often a lower performance and financial difficulties.     

Bidding behavior in the SNB’s repo auctions

The Swiss National Bank (SNB) provides reserves to market participants via fixed rate tender auctions. We analyze the banks’ bidding behavior and identify the determinants for the decision to participate as well as on the amount to tender. We find that a bank’s bids from the previous day, the amount of maturing repo operations with the SNB as well as the maturing volume on the interbank repo market have for most banks a significant effect. The autonomous factors (government balances at the SNB and currency in circulation) are of only minor importance. A further determinant is the attractiveness of the SNB’s auction rate compared to the prevailing interbank market repo rate. Further, the question is addressed whether the bidding behavior changed in the financial market crisis of 2007/2008. There is little evidence of a systematic change in bidding behavior in the crisis. This results from the fact that the SNB has addressed the volatile demand for reserves in the crisis with overnight fine-tuning operations.     

Reprint of: Market liquidity in the financial crisis: The role of liquidity commonality and flight-to-quality

We examine the dynamics and the drivers of market liquidity during the financial crisis, using a unique volume-weighted spread measure. According to the literature we find that market liquidity is impaired when stock markets decline, implying a positive relation between market and liquidity risk. Moreover, this relationship is the stronger the deeper one digs into the order book. Even more interestingly, this paper sheds further light on so far puzzling features of market liquidity: liquidity commonality and flight-to-quality. We show that liquidity commonality varies over time, increases during market downturns, peaks at major crisis events and becomes weaker the deeper we look into the limit order book. Consistent with recent theoretical models that argue for a spiral effect between the financial sector’s funding liquidity and an asset’s market liquidity, we find that funding liquidity tightness induces an increase in liquidity commonality which then leads to market-wide liquidity dry-ups. Therefore our findings corroborate the view that market liquidity can be a driving force for financial contagion. Finally, we show that there is a positive relationship between credit risk and liquidity risk, i.e., there is a spread between liquidity costs of high and low credit quality stocks, and that in times of increased market uncertainty the impact of credit risk on liquidity risk intensifies. This corroborates the existence of a flight-to-quality or flight-to-liquidity phenomenon also on the stock markets.     

Market liquidity in the financial crisis: The role of liquidity commonality and flight-to-quality

We examine the dynamics and the drivers of market liquidity during the financial crisis, using a unique volume-weighted spread measure. According to the literature we find that market liquidity is impaired when stock markets decline, implying a positive relation between market and liquidity risk. Moreover, this relationship is the stronger the deeper one digs into the order book. Even more interestingly, this paper sheds further light on so far puzzling features of market liquidity: liquidity commonality and flight-to-quality. We show that liquidity commonality varies over time, increases during market downturns, peaks at major crisis events and becomes weaker the deeper we look into the limit order book. Consistent with recent theoretical models that argue for a spiral effect between the financial sector’s funding liquidity and an asset’s market liquidity, we find that funding liquidity tightness induces an increase in liquidity commonality which then leads to market-wide liquidity dry-ups. Therefore our findings corroborate the view that market liquidity can be a driving force for financial contagion. Finally, we show that there is a positive relationship between credit risk and liquidity risk, i.e., there is a spread between liquidity costs of high and low credit quality stocks, and that in times of increased market uncertainty the impact of credit risk on liquidity risk intensifies. This corroborates the existence of a flight-to-quality or flight-to-liquidity phenomenon also on the stock markets.     

Securitized banking and the run on repo

The panic of 2007–2008 was a run on the sale and repurchase market (the repo market), which is a very large, short-term market that provides financing for a wide range of securitization activities and financial institutions. Repo transactions are collateralized, frequently with securitized bonds. We refer to the combination of securitization plus repo finance as “securitized banking” and argue that these activities were at the nexus of the crisis. We use a novel data set that includes credit spreads for hundreds of securitized bonds to trace the path of the crisis from subprime-housing related assets into markets that had no connection to housing. We find that changes in the LIB-OIS spread, a proxy for counterparty risk, were strongly correlated with changes in credit spreads and repo rates for securitized bonds. These changes implied higher uncertainty about bank solvency and lower values for repo collateral. Concerns about the liquidity of markets for the bonds used as collateral led to increases in repo haircuts, that is the amount of collateral required for any given transaction. With declining asset values and increasing haircuts, the US banking system was effectively insolvent for the first time since the Great Depression.     

Volatility in the federal funds market and money market spreads during the financial crisis

We analyze the role of federal funds rate volatility in affecting risk premium as measured by various money market spreads during the 2007–2009 financial crisis. We find that volatility in the federal funds market contributed to elevated Overnight Index Swap (OIS) spreads of unsecured bank funding rates during the crisis. Using OIS as a proxy for market expectations, we also decompose London Inter-Bank Offered Rate (Libor) into its permanent and transitory components in a dynamic factor framework and show that increased volatility in the federal funds market contributed to substantial transitory movements of Libor away from its long-run trend during the financial crisis.     

The dynamic relationship among the money market mutual funds,the commercial paper market,and the repo market

In this paper, we present the short-run and the long-run relationships among the financial assets of the money market funds, the commercial paper market, and the repurchase agreement market by undertaking a cointegration analysis of quarterly data over the 1985–2017 period. This was based on the empirical observation that the commercial paper and repo markets account for 50 percent of the assets of money market funds. The evidence suggests that there exists a common long-term cointegrating trend among these three components of the shadow banking system. Any disequilibrium in this long-run relationship among these variables is corrected by movement in the financial assets of money market funds. The Beveridge-Nelson decomposition from the estimated cointegrating relationship shows that the cyclical component of money market funds is large and captures huge swings in these markets during the financial crisis. We also find evidence of change in these dynamic relationships in the post-crisis period, where in addition to the money market funds, the commercial paper market also exhibits a tendency to correct for the disequilbrium.     

债券回购市场国际经验及对我国的借鉴

我国的债券回购市场以银行间债券回购市场为主导,近年来交易所回购市场呈现快速发展,债券回购市场成为金融机构、非金融企业、个人等众多市场主体直接参与的金融市场,随着投资者数量及市场规模的扩张,应对债券回购市场发展现状进行审视并寻求进一步完善。文章对国际主要回购市场的情况进行梳理,并提出完善我国债券回购市场的相关建议。     

Funding liquidity and equity liquidity in the subprime crisis period: Evidence from the ETF market

Using index and financial exchange-traded funds (ETFs), this study explores the relation between funding liquidity and equity liquidity during the subprime crisis period. Our empirical results show that a higher degree of funding illiquidity leads to an increase in bid–ask spread and a reduction in both market depth and net buying imbalance. Such findings indicate that an increase in funding liquidity can improve equity liquidity, with a stronger effect for the financial ETFs than for the index ETFs. Our study provides a better overall understanding of the effect of the liquidity–supplier funding constraint during the subprime crisis period.