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Repurchase agreements and the (de)construction of financial markets

Sissoko, Carolyn

Authors

Carolyn Sissoko



Abstract

© 2019, © 2019 Informa UK Limited, trading as Taylor & Francis Group. 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 favour of lenders.

Journal Article Type Article
Publication Date Jul 3, 2019
Journal Economy and Society
Print ISSN 0308-5147
Electronic ISSN 1469-5766
Publisher Taylor & Francis (Routledge)
Peer Reviewed Peer Reviewed
Volume 48
Issue 3
Pages 315-341
APA6 Citation Sissoko, C. (2019). Repurchase agreements and the (de)construction of financial markets. Economy and Society, 48(3), 315-341. https://doi.org/10.1080/03085147.2018.1525155
DOI https://doi.org/10.1080/03085147.2018.1525155
Keywords repurchase agreements; safe assets; market liquidity; banking; liquidity crises; secular stagnation
Publisher URL https://doi.org/10.1080/03085147.2018.1525155