The Run on Repo and the Fed's Response

Emergency Collateral Upgrades

“…19 In the Appendix, we document the usefulness of a different Fed facility (Single-TrancheTerm Repo) that provided term repos 17 Our finding that the PDCF and TSLF were important for financing corporate securities is consistent with Krishnamurthy et al (2014) who find that dealers that borrowed more through repo transactions secured by corporate securities tended to make greater use of both the PDCF and the TSLF. Our results that the TSLF was broadly used to upgrade illiquid collateral are also consistent with Gorton et al (2017).…”

“…By contrast, we do not find evidence that dealers turned to the Fed when there were sharp declines in financing of higher quality securities (Treasuries and Agencies). This difference by collateral is in line with Gorton et al (2017) who also find that the Fed's facilities were especially im-portant for lower quality collateral. The difference in use of the Fed's facilities for different types of collateral is consistent with the idea that most of the dealers' Treasury and Agency repos were used for matched book purposes, providing dealers with the flexibility to stop rolling the reverse repo in the event that the associated repo did not roll.…”

“…Doing so excludes the smallest dealers for whom such security prices or CDS spreads are not available, additionally confirming the robustness of the results to the exclusion of the smallest primary dealers. Gorton et al (2017) argue that increases in failures by the dealers to receive Treasury securities that they were supposed to receive prompted use of the facilities, especially the TSLF, as a way to obtain Treasuries. To this regard, we also include measures of failure to receive Treasury securities in Table 5; note that since we include week fixed effects, we are only looking at whether differences across dealers in fails to receive are linked to use of the facilities, not whether changes in aggregate fails over time affected facility use.…”

“…For example, Fleming et al (2010) find that TSLF auctions improve conditions in the repo market. Other work has analyzed who borrowed from the facilities: Acharya et al (2017) find that more troubled institutions tended to borrow more, and Gorton et al (2017) show that equity returns of broker-dealers increased on TSLF announcement and implementation dates. 7 Our analysis complements these studies by looking at how the use of these facilities actually affected the behavior of the borrowers, in terms of substituting for the reduced supply of private repo funding, and supporting dealers' credit to clients and their ability to finance illiquid inventories.…”

Collateral Damage

“…SeeGorton and Metrick (2012) andGorton et al (2017). 2 See Dang et al(2012).3 On the global reduction in safe assets since the crisis see BarclaysCapital (2012).…”