The Securitization Flash Flood
42 Pages Posted: 27 Jul 2016 Last revised: 17 May 2023
Date Written: June 20, 2019
Abstract
This paper highlights a connection between the stability of a bank's funding sources (i.e. debt claims) and the illiquidity of assets backing those claims. Using a natural experiment and hand-collected data on over 4,700 repurchase contracts, the paper shows that a shock that decreased illiquidity of private-label MBS resulted in a greater proportion of that asset being held on bank balance sheets, while being financed by unstable funding sources (short term repo debt). This finding is relevant to the recent banking crisis (Silicon Valley Bank collapse of March 2023) where losses on a bank's liquid assets led to a run by uninsured (“flighty”) depositors financing those assets.
Keywords: BAPCPA, securitization, repo markets, bank holding companies
JEL Classification: G21, G23
Suggested Citation: Suggested Citation