Item Summary

'ABSTRACT’ “We examine the desirability of granting “safe harbor” provisions to the sale and repurchase (repo) markets, i.e., granting repo contracts exemption from automatic stay in bankruptcy. Such exemption can enable financial intermediaries to raise greater liquidity and operate at higher leverage in normal times. This liquidity creation occurs, however, at the cost of ex-post inefficiency when there are adverse aggregate shocks to the fundamental quality of collateral underlying the contracts. When exempt from bankruptcy, creditors of highly leveraged financial intermediaries respond to such shocks by engaging in collateral liquidations. Financial arbitrage by less leveraged financial intermediaries equilibrates returns from acquiring financial assets at fire sale prices and those from real-sector lending, inducing a rise in lending rates, a deterioration in endogenous asset quality, and in the extremis, a credit crunch for the real sector. Given this inefficiency, an automatic stay on repo contracts in bankruptcy can be not only ex-post optimal, but also ex-ante optimal, especially for illiquid collateral with high exposure to aggregate risk.”

Descriptive Information

Title
Bankruptcy exemption of repo markets : too much today for too little tomorrow?
Sort Title
bankruptcy exemption of repo markets : too much today for too little tomorrow?
Creator of work
Acharya, Viral
Contributor
Anshuman, V. Ravi
Viswanathan, S.
Publisher
Bangalore : Indian Institute of Management Bangalore (IIMB)
Language
English
Date Created
2023
Format
Series
Series
Working Paper No : 676
Provenance
Open-access link provided by the Library of Congress Office, New Delhi, India
Rights Statement
Copyright Not Evaluated

Discovery Information

Subject
Economics
Economics
Finance
Marketing
Geographic Subject
India
Geographic Origin
India

Physical Characteristics

Page Count
2023
File Count
75

Institutional Information

Collection
Born Digital Monographic Reports and Papers
Box number
Monographic Reports and Papers (Publicly Accessible)
Folder number
27979088-a149-41a0-8e9f-7612e700a148
Barcode
27979088-a149-41a0-8e9f-7612e700a148
IIIF Manifest URL

https://figgy.princeton.edu/concern/ephemera_folders/27979088-a149-41a0-8e9f-7612e700a148/manifest