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Macroprudential regulation under repo funding

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  • Valderrama, Laura
Abstract
The use of collateral has become one of the most widespread risk mitigation techniques. While it brings stabilizing effects to the individual cash lender, it may exacerbate systemic risk by accelerating bank deleveraging under funding stress. We show how a liquidity shock to the cash lender may propagate as a solvency shock via liquidity hoarding even if the cash lender remains solvent in all states of nature. Albeit a privately optimal response of the cash lender to a liquidity shock, bank deleveraging may lead to excessive bankruptcy among its borrowing counterparties while, at the same time, triggering contagion across asset classes. To buttress financial system resilience, we lay out a menu of macroprudential policies that deactivate this channel of financial contagion.

Suggested Citation

  • Valderrama, Laura, 2015. "Macroprudential regulation under repo funding," Journal of Financial Intermediation, Elsevier, vol. 24(2), pages 178-199.
    • Handle: RePEc:eee:jfinin:v:24:y:2015:i:2:p:178-199
    DOI: 10.1016/j.jfi.2014.12.002
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    References listed on IDEAS

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    Cited by:

    1. Kelly, Robert & O'Toole, Conor, 2016. "Lending Conditions and Loan Default: What Can We Learn From UK Buy-to-Let Loans?," Research Technical Papers 04/RT/16, Central Bank of Ireland.
    2. Miglietta, Arianna & Picillo, Cristina & Pietrunti, Mario, 2019. "The impact of margin policies on the Italian repo market," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    3. Friesz, Melinda & Váradi, Kata, 2023. "Your skin or mine: Ensuring the viability of a central counterparty," Emerging Markets Review, Elsevier, vol. 57(C).
    4. Kelly, Robert & O’Toole, Conor, 2018. "Mortgage default, lending conditions and macroprudential policy: Loan-level evidence from UK buy-to-lets," Journal of Financial Stability, Elsevier, vol. 36(C), pages 322-335.
    5. Arianna Miglietta & Cristina Picillo & Mario Pietrunti, 2015. "The impact of CCPs' margin policies on repo markets," BIS Working Papers 515, Bank for International Settlements.
    6. Fukai, Hiroki, 2021. "Optimal interventions on strategic fails in repo markets," MPRA Paper 106090, University Library of Munich, Germany.

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