Repurchase Agreements and the De(con)struction of Financial Markets

27 Pages Posted: 12 Feb 2018

See all articles by Carolyn Sissoko

Carolyn Sissoko

University of the West of England (UWE)

Date Written: July 12, 2017

Abstract

The safety of repurchase agreements (repos) depends on the neoclassical premise that markets are reliable sources of liquidity; repos in practice disprove the theory by generating collateral calls, collateral sales, liquidity events and liquidity-driven losses for repo-borrowing funds and their end investors. As repo-type lending now dominates money markets, borrowers’ self-protective preference for ‘safe assets’ as collateral has distorted financial markets, disrupting private investment, and economic performance.

Using a balance sheet approach this paper explains the liquidity-supporting role of the traditional banking system and contrasts it with the liquidity-demanding repo-based financial system. The paper also argues that contractual structure determines the balance of power in private sector loans, that no private loan is ‘safe’ for both borrower and lender, and that repo has shifted the balance of safety decisively in favor of lenders.

Keywords: Repurchase agreements, safe assets, market liquidity, banking, liquidity crises, secular stagnation

JEL Classification: E5, G2, K2

Suggested Citation

Sissoko, Carolyn, Repurchase Agreements and the De(con)struction of Financial Markets (July 12, 2017). Available at SSRN: https://ssrn.com/abstract=3120187 or http://dx.doi.org/10.2139/ssrn.3120187

Carolyn Sissoko (Contact Author)

University of the West of England (UWE) ( email )

Blackberry Hill Bristol
Bristol, Avon BS16 1QY
United Kingdom

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