Collateral Runs

59 Pages Posted: 16 Jan 2018 Last revised: 30 Jan 2019

See all articles by Sebastian Infante

Sebastian Infante

Board of Governors of the Federal Reserve System

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2018

Abstract

This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than traditional wholesale funding runs because they are triggered by a contraction in dealers' assets, and thus mitigating these risks involve different policy recommendations.

Keywords: runs, repo, rehypothecation, dealer, liquidity, default, collateral

JEL Classification: G23, G33, G01, C72

Suggested Citation

Infante, Sebastian and Vardoulakis, Alexandros, Collateral Runs (January 29, 2018). Available at SSRN: https://ssrn.com/abstract=3099637 or http://dx.doi.org/10.2139/ssrn.3099637

Sebastian Infante (Contact Author)

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Alexandros Vardoulakis

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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