Repurchase agreements and the (de)construction of financial markets
© 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|
|Publisher||Taylor & Francis (Routledge)|
|Peer Reviewed||Peer Reviewed|
|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|
|Keywords||repurchase agreements; safe assets; market liquidity; banking; liquidity crises; secular stagnation|
This file is under embargo due to copyright reasons.
Contact Carolyn.Sissoko@uwe.ac.uk to request a copy for personal use.
You might also like
The Plight of Modern Markets: How Universal Banking Undermines Capital Markets
How to stabilize the banking system: Lessons from the pre-1914 London money market
Is financial regulation structurally biased to favor deregulation
The legal foundations of financial collapse