Use of the Federal Reserve's repo operations and changes in dealer balance sheets

Before the 2008 financial crisis, the Federal Reserve (Fed) regularly conducted repurchase agreements (repos) in a fairly modest size with primary dealers to adjust the supply of reserves in the banking system and to keep the federal funds rate at the target set by the FOMC. During the economic downturn that followed the financial crisis, the Fed engaged in large scale asset purchases in order to provide additional monetary accommodation, and those purchases significantly increased the supply of reserves and eliminated the need for the Fed to engage in repo operations to increase reserves in the system.

THE ESSAY ON A DOCTRINE OF TITLE-BASED SECURITY DEVICE

The paper deals with the concept of title-based security. The author examines the substance of the concept and its historical roots. The problems of repurchase agreements, retention of title, assignment with the security purposes and financial leasing are analyzed. The author is paying special attention to the bankruptcy issues, e.g. the insolvency of the provider of the security and the security creditor.

Collateral Runs

This paper models an unexplored source of liquidity risk large broker-dealers face: a withdrawal of collateral providers. 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 among collateral providers, reducing a dealer’s liquidity position and compromising their solvency. Collateral runs are triggered by a contraction in dealers’ assets making them markedly different than traditional wholesale funding runs. Mitigating these risks involves different policy recommendations.

Institutions, Liquidity Preference, and Reserve Asset Holding in the Eurozone Core and Periphery Before and After Crises: Some Stylized Facts

The monetary integration of the Eurozone initially accommodated endogenous money creation across its members; however, liquidity crises that followed the Global Financial Crisis (GFC) revealed structural disparities in liquidity provision in response to funding crises. By refusing to act as a lender of last resort, the European Central Bank pushed governments across the Eurozone to guarantee domestic financial liabilities. The importance of repurchase agreements to fund Eurozone banking and the predominance of European government bonds in general collateral left peripheral governments vulnerable to decreased private demand for their debt, and financially constrained by private intermediaries’ refusal of peripheral sovereign bonds in general collateral. This constraint created accelerated the sovereign debt crises driving the Eurozone crisis. This paper analyzes Eurozone banks’, National Central Banks’, and governments’ balance sheets to show how they have internalized the lessons from the GFC. We find that these entities have returned to holding larger concentrations of reserve assets, a practice that some architects of the Eurozone had hoped monetary integration at the supranational level would end. As Eurozone governments consider how to respond to the Covid-19 pandemic, liquidity crunches that hurt financial and fiscal activity across the Eurozone remain a risk.

3 Financial Collateral Transactions and their Standardization

This chapter examines collateral transactions. Being the backbone of secured funding with financial market counterparties, collateral underpins a variety of financial transactions within the global marketplace, such as repurchase agreements (repos), securities lending, and derivatives transactions-often collectively referred to as 'collateralised finance transactions' or simply 'collateral transactions'. In order to legally underpin a collateral transaction, parties to the transaction generally enter into the applicable master agreement, which will be a standard template document created and maintained by the relevant industry association. These include the Global Master Repurchase Agreement for repos; the Global Master Securities Lending Agreement for securities lending transactions; and the International Swaps and Derivative Association Credit Support Annex under the ISDA Master Agreement for derivatives transactions. The master agreements are standardised contracts in effect setting out the rights and obligations of the parties to relevant transactions. These contracts provide market participants with substantial standardization, efficiency, predictability, legal certainty, and flexibility in respect of legal and commercial aspects of transactions. In essence, these contracts are so widely used and with so little derogations that they function as lex mercatoria or the international law that applies to certain transactions between certain market participants.

Self-Fulfilling Fire Sales: Fragility of Collateralized Short-Term Debt Markets

This paper shows that collateralized short-term debt, although privately optimal for reducing borrowers’ risk-taking incentives, can induce fragility (multiple equilibria). Despite sequential-service property being absent in collateralized debt, such as repurchase agreements, a systemic run can arise, featuring large increases in default risks, fire-sale discounts of collateral, cost of credit, and amount of credit rationing. Asset price guarantees, leverage caps, and central clearing promote stability and welfare. Using global games techniques, I show that a systemic run is more likely in bad times, and a large enough asset price guarantee reduces run risks.

Revisiting the concept of liquidity in liquidity preference

This paper revisits Keynes’s theory of liquidity preference to emphasise its reliance on liquidity. By clarifying the meaning of ‘liquidity’ in the context of the theory, it is argued that liquidity preference is not based on the demand for money, the most tradable asset, or a theory of bearishness. Instead, liquidity preference represents a demand for price-protected (capital-safe) assets, most directly inside and outside money, but also cash-equivalent quasi-money such as self-liquidating assets and security repurchase agreements (repo). The theory of liquidity preference explains that the public is willing to forgo interest income to hold short-term price-protected assets due to the capital and price uncertainty associated with relying on market liquidity, or how easy it is to convert an asset into money. It follows that the rate of interest is a monetary phenomenon and is determined independently of saving and investment.