The panic of 20072008 was a run on the sale and repurchase. We refer to the combination of securitization plus repo finance as securitized. Sudipto bhattacharya, georgy chabakauri and kjell g nyborg. The purpose of this paper is to propose a mechanism for this new kind of bank run, and to. The run on the shadow banking system, which began in the summer of 2007 and peaked following the failure of lehman in september and october 2008, was stabilized only after the creation of a series of official liquidity facilities and credit guarantees that replaced private sector guarantees entirely. A bank in need of cash can raise deposit rates to attract it. Asset pricing, corporate finance, economic fluctuations and growth, monetary economics the panic of 20072008 was a run on the sale and repurchase market the repo market, which is a very large, shortterm market that provides financing for a wide range. In step a, depositors transfer money to the bank, in return for a checking or savings account from which withdrawals can be made at any time. Bhattacharya, sudipto and chabakauri, georgy and nyborg, kjell g.
Barrf in the leadup to the financial crisis, the u. Securitized banking and the run on repo papers in the ssrn. Gorton and metrick 2009 characterized the global financial crisis as a systemwide run in the securitized banking systemmore precisely a run on the repo marketsimilar to. See voya securitized credit fund vcfax mutual fund ratings from all the top fund analysts in one place. The credit guarantees were structured to reduce bank capital requirements, while providing recourse to. The vast majority of repos were collateralized by safe government securities, they say, not riskier securitized mortgage products. The panic of 20072008 was a run on the sale and repurchase market the repo. November, 2009 abstract the panic of 20072008 was a run on the sale and repurchase market the repo market, which. One battle that has gotten media attention is a class action against jp morgan chase, where pension funds that were clients of jp morgan are claiming that officials of the giant bank, up to and including ceo.
Crises are sudden, unpredictable events, although the level of fragility may be observable. A repurchase agreement, also known as a repo, rp, or sale and repurchase agreement, is a form of shortterm borrowing, mainly in government securities. Finally, the cash raised in traditional banking is lent out, with the resulting loans held on the balance sheet. Gorton, gary and andrew metrick 2010b, haircuts, federal reserve bank of st. Shadow banking permitted institutions to avoid comprehensive supervision and capital requirements. Securitized lending, asymmetric information, and financial crisis. Securitized banking and the run on repo, journal of.
In securitized banking, funds are lent only temporarily, with loans repackaged and resold as securitized bonds. By packaging them into diversified bonds origination, which can be sold, they get more liquid. Using a large sample of banks, we find that increases in repurchase agreements repos were recognized by external capital markets to increase bank risk in the precrisis period. Securitized banking and the run on repo ideasrepec. Banking system plays a key role in the economic development of the united states of america. Securitized banking and the run on repo, journal of financial economics, june 2012, 425 451. Securitization is a process that, through tranching, repackages cash flows from underlying loans and creates assets that are perceived by market participants as fully safe, while collateralintermediation means supporting collateralbased operations within the. So while the run on repo may have contributed to the problems of a few repo borrowers that were relying heavily on repo with riskier collateral, in general, the run on repo was a sideshow, nagel said. A traditional banking run is driven by the withdrawal of deposits, while a securitized banking run is driven by the withdrawal of repurchase repo agreements. Department of finance, london school of economics and political science, london, uk. The extant literature suggests that one of the main causes of the recent financial crisis was the excessive use of shortterm debt by banks. A repurchase agreement repo is a form of shortterm borrowing for dealers in government securities.
The dealer sells the underlying security to investors and, by agreement between the two parties, buys them back shortly afterwards, usually the following day, at a slightly higher price. The panic of 20072008 was a run on the sale and repurchase market the repo market, which is a very large, shortterm market that provides. Check to see if you are eligible for free downloads. Securitized banking and the run on repo, yale school of management, working paper. The underbelly of securitized banking is showing, as investors and traders fight over the scraps left after the financial crisis of 20072008. The role of securitized lending and shadow banking in the 2008 financial crisis essay debora dyankova student number. Shortterm debt and bank risk journal of financial and. Looking for online definition of repo or what repo stands for. Loans demand deposits funds lent cash illiquid loans suspended convertibility systemic event banking sector became insolvent provide a new perspective of the contagion in crisis traditional banking 1. Asset pricing, corporate finance, economic fluctuations and growth, monetary economics the panic of 20072008 was a run on the sale and repurchase market the repo market, which is a very large, shortterm market that provides. Subscribe to this free journal for more curated articles on this topic. Securitized banking and the run on repo securitized banking and the run on repo gorton, gary. The bonds had a 10year maturity, a moodys a3 rating, and a 7. Securitized banking, procyclical bank leverage, and.
Securitized banking and the run on repo sciencedirect. During the free banking era banking slowly changed, first in the cities, and. To provide background for our analysis, we illustrate the differences between traditional banking and securitized banking in fig. How securitization really works money, banking and. Lenders holding privatelyproduced collateral in the repo market, e. The purpose of this paper is to propose a mechanism for this new kind of bank run, and. Regulating the shadow banking system gary gorton yale and nber andrew metrick yale and nber october 18, 2010. Securitized banking and the run on repo, journal of financial economics. The run on repo and the feds response gary gortony toomas laaritsz andrew metrickx november 8, 2017 abstract we document that the financial crisis of 20072008 was a repo run in two directions.
Repo transactions are collateralized, frequently with securitized bonds. This banking system repo based on securitization is a genuine banking system, as large as the traditional, regulated banking system. We refer to the combination of securitization plus repo. Free banking laws were the basis for the national bank. Gorton, professor of management and finance, yale school of management, february 20, 2010. We document that the financial crisis of 20072008 was a repo run in. Banking system and its impact on the economic development. A common feature of all types of banking whether it is in the free banking era or modern repo markets, is the prevalence of debtondebt. In the shadow banking system aka securitized banking. Endogenous regulation and nineteenth century commercialbank clearinghouses.
The importance of depositorbank relationships and networks. Securitized banking and the run on repo researchgate. Repo is listed in the worlds largest and most authoritative dictionary database of abbreviations and acronyms the free. Securitized banking and the run on repo american economic. Role of securitized lending and shadow banking in the 2008. We document that commercial banks set up conduits to securitize assets while insuring the newly securitized assets using credit guarantees. The pillar of the shadow banking system is the repo. Developments in repo markets during the financial turmoil.
The two most important functions of shadow banking are securitization and collateralintermediation. This banking system the shadow or parallel banking system. November 9, 2010 abstract the panic of 20072008 was a run on the sale and repurchase market the repo market. Consequently, the stability properties of the securitized banking system with procyclical bank leverage will depend on the strength of the funding cost channel of asset price determination, while for a banking system without procyclical bank leverage, the two channels of asset will always be stable. The purpose of this paper is to propose a mechanism for this new kind of bank run, and to provide supporting evidence for this mechanism through analysis of a novel data set. The financial crisis and the path of reform michael s. The 2007 2008 financial crisis was a framework wide bank run which happened in the securitizedmanaging an account framework and was driven by the withdrawals of a repurchase agreement claessens et al, 2012. After analyzing repurchase agreements by moneymarket funds and security lenders, researchers from stanford graduate school of business and northwestern university believe that banks offbalancesheet collateralization of commercial paper is more likely than repos to have prompted the run on shortterm debt financing in the recent financial crisis. Securitized banking, asymmetric information, and financial. Securitized banking and the run on repo gary gorton yale and nber andrew metrick yale and nber first version. These facilities allowed banks to bring collateral to the fed in.
To examine securitized banking activities, an augmented measure of berger and bouwmans rev financ stud 22. Securitized banking, or, the shadow banking system the need for lowrisk secure, shortterm lending between giant financial institutions gave rise to what is called the shadow banking system, also known as the parallel banking system. Securitized products such as mbs, abs, cdo, clo and abcp are debts that. We analyze assetbacked commercial paper conduits which played a central role in the early phase of the financial crisis of 200709. Both the quantity and price data suggest that there was a run on repo backed by nonagency mbsabs collateral, while the repo market for treasury and agency collateral was not signi cantly a ected. Securitized lending, asymmetric information, and financial. G1,g19 abstract the panic of 20072008 was a run on the sale and repurchase market the repo market, which is a very large, shortterm market that provides financing for a wide range of securitization activities. The coefficient estimates for dealers and collateral class have been ranked from smallest to. Securitized banking, asymmetric information, and financial crisis. Download citation securitized banking and the run on repo we introduce a.