Liberty Street Economics

« Back to the Future: Revisiting the European Crisis | Main | Sizing Up the Fed’s Maturity Extension Program »

October 18, 2011

Just Released: Money and Payments Workshop Examines Repo Market Reform

Gara Afonso and Antoine Martin

We have just posted the proceedings of a workshop held on October 7, 2011, which gathered the very latest thinking by academics, central bankers, and practitioners on how the repo market should be reformed to help avoid a recurrence of the recent financial crisis. In this large and important market, securities dealers find short-term funding for a substantial portion of their own and their clients’ assets. The difficulties experienced by Bear Stearns and Lehman Brothers in 2008 clearly owed much to the precipitous declines in the funding that these firms had long obtained from the tri-party repo market.

    The agenda for the workshop began with four academic studies, continued with a session focused on policy issues, and closed with a panel of academics and practitioners discussing the policy issues. The papers and the slides of the presentations are all available online, through links on the agenda. Earlier posts on Liberty Street Economics contain more information about the tri-party repo market and about the current reforms.


Here is a quick walk through the proceedings:

    Two of the academic papers study the tri-party repo market during the recent crisis and document the type of stresses that were experienced in this market. A third paper investigates the effect of implicit guarantees on the risk-taking behavior of money market mutual funds, which make up a large class of investors in the tri-party repo market. The last paper looks at how banks tried to obtain liquidity after the freeze of the asset-backed commercial paper market in the fall of 2007.

    During the policy session, Susan McLaughlin (New York Fed) presented an overview of the current state of reforms in the tri-party repo market. Enrico Perotti (University of Amsterdam) argued that recent extensions of the “safe harbor privilege,” which gives favorable treatment to some financial contracts in bankruptcy, may have gone too far and could have contributed to financial instability. This theme was also present in the work presented by Mark Roe (Harvard University), who argued that safe harbor provisions weaken market discipline. Viral Acharya (New York University) discussed a proposal for a liquidation facility for the tri-party repo market, which could limit the risk of a fire sale in case of a large dealer’s default.

    For the closing panel—moderated by Lucinda Brickler (New York Fed)—two academics, Andrew Metrick (Yale University) and Suresh Sundaresan (Columbia University), and two members of the industry, Darryll Hendricks (UBS) and Thomas Wipf (Morgan Stanley), gave their views on the various presentations and proposals.

    The workshop generated a productive exchange of ideas among academics, central bankers, and practitioners. Exchanges of this kind will prove particularly important as the tri-party repo market reform effort tries to balance the need for financial stability with the goal of efficient financial markets.


Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
Posted by Blog Author at 10:00:00 AM in Financial Markets
Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.

About the Blog
Liberty Street Economics features insight and analysis from economists working at the intersection of research and Fed policymaking.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

Upcoming Posts
Useful Links
Feedback & Custom Guidelines
Liberty Street Economics invites you to comment on a post.
Comment Guidelines
We encourage you to submit comments, queries and suggestions on our blog entries. We will post them below the entry, subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted more than 1 week after the blog entry appears will not be posted.
Please try to submit before COB on Friday: Comments submitted after that will not be posted until Monday morning.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. The moderator will not post comments that are abusive, harassing, or threatening; obscene or vulgar; or commercial in nature; as well as comments that constitute a personal attack.  We reserve the right not to post a comment; no notice will be given regarding whether a submission will or will not be posted.
Archives