Collateral Runs
59 Pages Posted: 16 Jan 2018 Last revised: 30 Jan 2019
There are 2 versions of this paper
Collateral Runs
Collateral Runs
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: Suggested Citation