Repo and Unsecured Interbank Markets Under Stress

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Topic: Repo and unsecured interbank markets under stress: Evidence from transaction-level data

Speaker: Dr Nicholas Garvin, Research Economist at Reserve Bank of Australia

Abstract: This paper examines banks’ substitution between repo and unsecured interbank markets during the financial-system stress in 2008. We identify banks’ reactions within and across markets using transaction-level data, which permits controlling for endogenous counterparty matching, and exploit an exogenous shock emanating from outside the financial system. Risky banks’ unsecured borrowing declines, consistent with previous studies. We additionally show that banks with sufficient high-quality collateral increase repo borrowing, and moreover, risky banks with plentiful collateral substitute from the unsecured to the repo market. The rising demand for repo funding pushes down rates against first-best collateral, which is scarce in our sample, by over 100 basis points, while the market against second-best collateral expands considerably. Banks do not hoard liquidity by reducing unsecured lending; behaviour is more consistent with accumulating liquidity from the central bank. Our results are robust to placebo tests before the crisis.

Date: Tuesday, 3 September 2019
Time: 12.00 – 1.00 p.m.
Venue: University of Technology, Sydney
               Building 8, Room 08.003, Dr Chau Chak Wing Building
               Dr Chau Chak Wing Building
              14 - 28 Ultimo Road, Ultimo

Co-ordinator: Claire Liu  (Ph: +61 2 9514 7748)

Enquiries: Mala Kapahi (Ph: +61 2 9514 7777)