This paper presents a model of repo intermediation in which dealers intermediate secured financing between lenders and borrowers using the same collateral. Lenders are insulated from dealers through their repo’s collateral, but borrowers are exposed to dealers through the loss of their collateral. This makes lenders’ repo terms insensitive to dealers’ default, while borrowers’ repo terms are not. The model shows that when repos serve to intermediate collateral, haircuts are negative. This paper explains the difference in haircuts between the bilateral and tri-party repo market and the different run dynamics observed across these markets during the financial crisis.

Abstract We theoretically and empirically show how the reuse of Treasury securities as collateral alleviates safe asset scarcity. Our model characterizes how reuse allows intermediaries to efficiently reallocate the safety benefits of long-term Treasury securities to a broader investor base. By reusing Treasury securities, intermediaries can access more collateral to create safe assets without interest rate risk. When the demand for safe assets is high, intermediaries increase reuse, distributing safe asset benefits to investors that value safety the most. Using supervisory data to calculate a dealer-level measure of reuse called the “collateral multiplier,” we empirically confirm the model’s main predictions.

We model the role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also enable dealers to source assets without taking ownership. When the asset trades with repo specialness, i.e, when the associated repo rate is significantly below prevailing market rates, borrowing the asset is more expensive, resulting in higher bid-ask spreads. Limiting a single dealer’s leverage decreases its market-making abilities, so the dealer charges a higher bid-ask spread. However, limiting all dealers’ leverage reduces pressure on repo specialness, thus decreasing bid-ask spreads. More generally, this paper characterizes the importance of collateralized borrowing and lending for bond market intermediation, shows how frictions in repo markets can affect the underlying cash market liquidity, and underscores the importance of securities lending.

Abstract This paper models an unexplored source of liquidity risk large broker-dealers face: a withdrawal of collateral providers. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities among collateral providers, reducing a dealer’s liquidity position and compromising their solvency. Collateral runs are triggered by a contraction in dealers’ assets making them markedly different than traditional wholesale funding runs. Mitigating these risks involves different policy recommendations.