The Securitization Flash Flood

Abstract

This paper highlights a connection between stability of a bank's funding sources (debt claims) and the liquidity of assets backing those claims. Using a natural experiment and hand-collected data on over 5,000 repurchase contracts, the paper shows that a shock that increased liquidity of private-label MBS resulted in a greater proportion of MBS financed on balance sheet by unstable funding sources (short term repo debt). This finding is relevant to the recent banking crisis (SVB collapse of March 2023) where losses on a bank's liquid assets led to a run by uninsured ("flighty") depositors financing those assets.

Keywords: securitization, bankruptcy safe harbor, repurchase contracts, uninsured depositors, financial crises

JEL Classification: G21, G23, K2