Primary Dealers During the 2007-08 Crisis: Assessing Risks and Vulnerabilities
44 Pages Posted: 28 Oct 2018 Last revised: 21 Jul 2019
Date Written: July 19, 2019
Abstract
We study key vulnerabilities of the US Primary Dealers during the 2007-08 financial crisis. Dealers’ exposure to risky assets drives the repo run; importantly, repos become sensitive to counterparty risk only at the height of the crisis. Further, the way in which dealers use repo funding exposes them to several risks: financing illiquid assets with overnight repos exposes dealers to significant fire-sale risk; dealers are also exposed to rollover risk due to the maturity mismatch they take when intermediating credit to clients. Finally, we show how quickly illiquidity can spread across dealers, via chains of settlement fails.
Keywords: Financial Intermediation, Primary Dealers, Financial Crisis, Repos
JEL Classification: G01, G10, G20
Suggested Citation: Suggested Citation