Repo Chains and Financial Instability

Repo Chains and Financial Instability

There are three issues with Repos.

  • Repo chains as source of instability
  • Impact of Repo on Money Supply
  • Re-hypothecation: Reuse of Repo and Leverage


From Collateral Shortages and Intermediation Networks


In the pre-crisis period, financial markets witnessed a growing reliance on short-term funds raised in wholesale markets. In particular, there was a dramatic rise in the use of sales and repurchase (repo) agreements to fund longer-term investment opportunities or to finance inventories of securities held for market-making purposes. Given that such funding opportunities were secured by collateral, they were mostly considered to be safe. Since the crisis of 2007–8, however, the repo and the asset-backed commercial paper (ABCP) markets have been viewed as one of the potential sources of fragility in the financial system, with conventional wisdom (partially) attributing the collapse of Bear Stearns, Lehman Brothers, and Northern Rock to their reliance on wholesale funding.


From The Economics of Collateral Chains


The ‘supply’ of pledged collateral is typically received by the central collateral desk of banks that re-use the collateral to meet the ‘demand’ from the financial system. The key providers of primary (or source) collateral to the ‘street’ (or large banks) are: hedge funds; securities lending (via custodians) on behalf of pension funds, insurers, official sector accounts, etc. and commercial banks that liaise with large banks. The securities they hold are continuously re-invested to maximize returns over their maturity tenor. Source collateral is collateral that can be re-pledged, creating dynamic collateral chains. The term re-pledged is a legal term and means that the dealer receiving the collateral has the right to reuse in its own name.  Since a single piece of source collateral can be re-used several times by several different intermediaries, the aggregate volume of repledged collateral reflects both the availability of collateral (that is collateral from the source) as well as the velocity (or reuse rate) of source collateral.


From The Economics of Collateral Chains


The ratio of the total collateral received by the large banks divided by the ‘source’ collateral is the velo- city of collateral due to the intermediation by the street. For end-2007, the numerator of $10 trillion is what the large banks received in pledged collateral. We then compare it to the denominator or the primary sources of collateral via the hedge funds and security lenders acting on behalf of pension, insurers, official accounts, etc. − this was about $3.4 trillion. Empirical evidence suggests that the chains were longer pre-Lehman and around 3 as of end-2007; they have decreased to about 2.4 as of end-2010. Intuitively, this means that collateral from a primary source now takes ‘fewer steps’ to reach the ultimate client. This is due to the concern of source collateral providers about counterparty risk of the large banks, and also from the demand for higher quality collateral by the ultimate clients. Lower quality collateral is difficult to move in the present time.


From The Economics of Collateral Chains


This decline in the re-use of collateral may be viewed positively from a financial stability perspective. However, from a monetary policy perspective, the lubrication in the global financial markets is now lower as the velocity of money type instruments has declined. The shorter “chains” − from constraining the collateral moves lowers global financial lubrication will increase overall cost of capital to the real economy.

Overall, global liquidity remains below pre-Lehman levels. When we consider collateral use/re-use in addition to M2 or the monetary base in U.S., U.K. and Eurozone, financial lubrication was over $30 trillion before Lehman (and one-third came via pledged collateral); now it is lower by about $4-5 trillion. Since cross-border funding is important for large banks, allowing for the efficient arbitrage of their funding operations, (e.g., consider the recent surge in the demand for U.S. dollar funding by European banks), the state of the pledged collateral market needs to be considered when setting monetary policy.


Key Sources of Research:


Velocity of Pledged Collateral: Analysis and Implications

Manmohan Singh

November 2011


Sizing Up Repo 

Arvind Krishnamurthy   Stefan Nagel

Dmitry Orlov

June 2011


Click to access Sizing-up-repo_June29.pdf



Jason Roderick Donaldson Eva Micheler

January 2, 2016


Click to access


Infante, S. (2015).

Liquidity windfalls: The consequences of repo rehypothecation.

Technical report, Federal Reserve Board of Governors Finance and Economics Dis- cussion Series 2015-22.


Kahn, C. M. and H. J. Park


Collateral, rehypothecation, and efficiency.

UIUC Working paper.


Lee, J. (2015).

Collateral circulation and repo spreads.

Technical report


Singh, M. (2010).

The velocity of pledged collateral.

Technical report, IMF.


Singh, M. and J. Aitken (2010).

The (sizable) role of rehypothecation in the shadow banking system.

Technical report, IMF.


Gorton, G. and A. Metrick (2010).


Review (Nov), 507–520.


Gorton, G. and A. Metrick (2012).

Securitized banking and the run on repo.

Journal of Financial Economics 104(3), 425–451.


Copeland, A., A. Martin, and M. Walker (2014).

Repo runs: Evidence from the tri- party repo market.

The Journal of Finance 69(6), 2343–2380.


Antinolfi, G., F. Carapella, C. Kahn, A. Martin, D. Mills, and E. Nosal (2014).

Repos, Fire Sales, and Bankruptcy Policy.

Review of Economic Dynamics, (forthcoming).


Financial Intermediation Networks

Marco Di Maggio† Alireza Tahbaz-Salehi

March 2015

Click to access Intermeidation-March2015.pdf


Collateral Shortages and Intermediation Networks

Marco Di Maggio  Alireza Tahbaz-Salehi

October 1, 2015


The political economy of repo markets

Daniela Gabor

Click to access gabor_political_economy_of_repo_markets.pdf


Collateral Risk, Repo Rollover and Shadow Banking

Shengxing Zhangú

August 28, 2014


Click to access Zhang%20paper.pdf


Shadow Interconnectedness: The Political Economy of (European) Shadow Banking

Daniela Gabor

September 16, 2013


Systemic Risk, Contagion, and Financial Networks: A Survey

Matteo Chinazzi Giorgio Fagiolo

June 3, 2015


A Map of Collateral Uses and Flows


Andrea Aguiar Richard Bookstaber Dror Y. Kenett Thomas Wipf

Click to access OFRwp-2016-06_Map-of-Collateral-Uses.pdf


Aguiar, A., R. Bookstaber, and T. Wipf.

“A Map of Funding Durability and Risk.”

Office of Financial Research Working Paper no. 14-03, 2014.


Baklanova, V.,

“Repo and Securities Lending: Improving Transparency with Better Data.”

Office of Financial Research Brief no. 15-03, 2015.


Baklanova, V., A. Copeland, and R. McCaughrin.

“Reference Guide to U.S. Repo and Securities Lending Markets.”

Office of Financial Research Working Paper no. 15-17, 2015.


Shadow Banks and Systemic Risks

Rui Gong Frank H. Page Jr.

July 23, 2015


Financial Contagion with Collateralized Transactions: A Multiplex Network Approach

Gustavo Peralta  Ricardo Crisóstomo

July 2016


Non-bank financial institutions: Assessment of their impact
on the stability of the financial system


Click to access ecp472_en.pdf


Taxonomy of Studies on Interconnectedness

Gazi Kara  Mary H. Tian Margaret Yellen

December 15, 2015



Financial Plumbing and Monetary Policy

Manmohan Singh

June 2014


Click to access wp14111.pdf


Haircuts and Repo Chains

Tri Vi Dang

Gary Gorton

Bengt Holmström

Click to access Paper_Repo.pdf


Nonbank Financial Intermediation, Financial Stability, and the Road Forward

Stanley Fischer


Click to access fischer20150330a.pdf


Financial Intermediation Chains in an OTC Market

Ji Shen  Bin Wei  Hongjun Yan

December 15, 2015


Dealer Networks

Dan Li Norman Schürhoff

October 22, 2014


Systemic Risks in Repo Markets


Somnath Chatterjee


8, November 2013

Click to access 2013-operacionalizacion-estabilidad-financiera-t-07.pdf


Systemic risk in the repo market.


Alexander Shkolnik

Click to access fmws1_12590.pdf


The Economics of Collateral-Chains

Manmohan Singh



Click to access 010112.pdf


Collateral Reuse as a Direct Funding Mechanism in Repo Markets

George Issa Elvis Jarnecic

Click to access EFMA2016_0566_fullpaper.pdf


Repo Runs

Antoine Martin David Skeie Ernst-Ludwig von Thadden

Click to access sr444.pdf


Securitized Banking and the Run on Repo

Gary Gorton

Andrew Metrick

First version: January 22, 2009 This version: November 13, 2009

Click to access gorton_run_on_repo_nov.pdf


Who Ran on Repo?

Gary Gorton, Andrew Metrick

October 4, 2012

Click to access whorancompleteoctober4.pdf


Repo Runs: Evidence from the Tri-Party Repo Market

Adam Copeland Antoine Martin Michael Walker

Click to access sr506.pdf


Matching Collateral Supply and Financing Demands in Dealer Banks


Adam Kirk, James McAndrews, Parinitha Sastry, and Phillip Weed


Click to access 1412kirk.pdf


Collateral Reuse in Shadow Banking and Monetary Policy

Ameya Muley∗

7th January 2016


Money for Nothing: The Consequences of Repo Rehypothecation

Sebastian Infante

Federal Reserve Board September 19th, 2014 Abstract


Intermediary Funding Liquidity and Rehypothecation as Determinants of Repo Haircuts and Interest Rates

Egemen Eren

Stanford University July 23, 2014

Click to access eren2014.pdf


Re-use of collateral in the repo market

Lucas Marc Fuhrer, Basil Guggenheim and Silvio Schumacher


Click to access working_paper_2015_02.n.pdf


Collateral Reuse as a Direct Funding Mechanism in Repo Markets

George Issa Elvis Jarnecic


Click to access EFMA2016_0566_fullpaper.pdf


Rehypothecation and Liquidity

David Andolfatto Fernando M. Martin  Shengxing Zhang



Matching Prime Brokers and Hedge Funds∗

Egemen Eren†


December 23, 2015

Click to access eren_jmp.pdf


Collateral, Rehypothecation, and Efficiency

Charles M. Kahn† Hye Jin Park‡

Last updated: April 15, 2015

Click to access Collateral_Rehypothecation_and_Efficiency.pdf


The market for Collateral: the Potential impact of Financial Regulation

Jorge Cruz Lopez, Royce Mendes and Harri Vikstedt

Click to access fsr-0613-lopez.pdf



David Andolfatto Fernando Martin Shengxing Zhang

February 26, 2014

Click to access andolfatto_spring2014.pdf


Collateralized Security Markets

John Geanakoplos William R. Zame

Click to access refs4661465000000000040.pdf




Click to access brq411_Rehypothecation.pdf


Collateral and Monetary Policy

Manmohan Singh


Click to access wp13186.pdf


Financial Plumbing and Monetary Policy

Prepared by Manmohan Singh

June 2014

Click to access wp14111.pdf


Understanding the role of collateral in financial markets

M Singh


Click to access 20150223-singh-slides.pdf


Systemic Risk and Stability in Financial Networks

Daron Acemoglu Asuman Ozdaglar Alireza Tahbaz-Salehi
This version: January 15, 2013



Systemic Risk in Endogenous Financial Networks

Daron Acemoglu Asuman E. Ozdaglar Alireza Tahbaz-Salehi

January 22, 2015


Towards a theory of shadow money

Daniela Gabor and Jakob Vestergaard

Click to access Towards_Theory_Shadow_Money_GV_INET.pdf


Do Shadow Banks Create Money?

Jo Michell

Click to access 1602.pdf


How Does Monetary Policy A􏰝ffect Shadow Bank Money Creation? 

Kairong Xiao†

June 17, 2016

Click to access paper_296.pdf


The Economic Consequences of ‘Market-Based’ Lending

Carolyn Sissoko

May 24, 2016


Key Mechanics of the U.S. Tri-Party Repo Market

Adam Copeland, Darrell Duffie, Antoine Martin, and Susan McLaughlin


Click to access 1210cope.pdf


The Failure Mechanics of Dealer Banks

Darrell Duffie


Click to access DuffieFailureMechanicsDealerBanks2010.pdf


The Euro Interbank Repo Market

Loriano Mancini Angelo Ranaldo Jan Wrampelmeyer

March 26, 2014

Click to access angeloranaldopaper_4.pdf




Multiplex Financial Networks


Multiplex Financial Networks


These are multilayer networks but not Hierarchical (multi-scale) networks.  This is one of latest research area in financial networks. Several research papers published in 2015 and current year are using multiplex networks to analyze multiple credit relationships in Interbank market.

  • Short term debt chains
  • Overnight debt chains
  • Long Term Debt chains
  • Collateral chains


From The multiplex structure of interbank networks


Network analysis has contributed to characterize, understand and model complex systems of interconnected financial institutions and markets (Gai and Kapadia, 2010; Battiston et al., 2012). These tools are gaining popu- larity also among policymakers. Most contributions focus on the interbank market1, the plumbing of modern financial systems, especially in the Euro area. In the network perspective, the interbank market is commonly rep- resented as a standard directed and weighted graph. Each link represents a credit relation between two counterparties. Directionality identifies the borrower and the lender; the weight of the link represents the loan amount. In general, the interbank market is much richer and complex than a simple weighted graph. In this paper we explore the differences in credit relations due to maturity of the contract or the presence of collateral. Due to lack of data availability, existing empirical literature either (i) disregards the hetero- geneity of credit relations or (ii) focuses only on one type, implicitly assuming that the network of the selected type of credit relations is a good proxy for the networks of other types. In the latter case, the vast majority of contributions focus on the overnight unsecured market. These two approaches are parsimo- nious but may provide biased results if the underlying “representativeness” assumptions fail.


From  Interbank markets and multiplex networks: centrality measures and statistical null models


Interlinkages between any two financial institutions is more complex than the information that can be summarized in a single number (the weight of the link) and a direction, such as in a directed and weighted network. This is due to the fact that between two institutions there exists a multiplicity of linkages, each of them related to one class of claims/obligations. The interplay between different types of relation could be relevant for systemic risk analysis. In the network jargon, such a situation is best modeled with a multiplex network or simply multiplex. A multiplex is made up with several ”layers”, each of them composed by all relations of the same type and modeled with a simple (possibly weighted and directed) network. Since the nodes in each layer are the same, the multiplex can be visualized as a stack of networks or equivalently by a network where several different types of links can coexist between two nodes, each type corresponding to a layer.


Key Sources of Research:


The multi-layer network nature of systemic risk and its implications for the costs of financial crises

Sebastian Poledna1, Jos ́e Luis Molina-Borboa4, Seraf ́ın Mart ́ınez-Jaramillo4, Marco van der Leij5,6,7, and Stefan Thurner


Click to access 1505.04276.pdf


Using multiplex networks for banking systems dynamics modelling

Valentina Y. Guleva, Maria V. Skvorcova, and Alexander V. Boukhanovsky


Systemic risk in multiplex networks with asymmetric coupling and threshold feedback

Rebekka Burkholz, Matt V. Leduc, Antonios Garas & Frank Schweitzer

Click to access 1506.06664.pdf


Networks of Networks: The Last Frontier of Complexity-A Book Review

Manuel Alberto M. Ferreira


Interconnected Networks

Editors: Garas, Antonios (Ed.)


Multilayer networks

Mikko Kivelä Alex Arenas Marc Barthelemy James P. Gleeson Yamir Moreno

and Mason A. Porter


Multi-layered Interbank Model for Assessing Systemic Risk

Mattia Montagna and Christoffer Kok

Click to access 1873_KWP.pdf


Nonlinear Dynamics on Interconnected Networks

Alex Arenas, Manlio De Domenico


The multiplex dependency structure of financial markets


Nicol ́o Musmeci,1 Vincenzo Nicosia,2 Tomaso Aste,3, 4 Tiziana Di Matteo,1, 3 and Vito Latora

Click to access 1606.04872.pdf


Process Systems Engineering as a Modeling Paradigm for Analyzing Systemic Risk in Financial Networks


Click to access OFRwp-2015-02-11-Process-Systems-Engineering-as-a-Modeling-Paradigm.pdf


Financial Contagion with Collateralized Transactions: A Multiplex Network Approach
Gustavo Peralta  Ricardo Crisóstomo

July 2016


The multiplex structure of interbank networks

L. Bargigli,a G. di Iasio,b L. Infante,c F. Lillo,d F. Pierobone

November 20, 2013

Click to access 1311.4798.pdf


Interbank markets and multiplex networks: centrality measures and statistical null models

Leonardo Bargigli, Giovanni di Iasio, Luigi Infante, Fabrizio Lillo and Federico Pierobon

Click to access 1501.05751.pdf


Strength of weak layers in cascading failures on multiplex networks: case of the international trade network

Kyu-Min Lee & K.-I. Goh


Click to access srep26346.pdf



 Cascades in multiplex financial networks with debts of different seniority

Charles D. Brummitt

Teruyoshi Kobayashi


Multiplex interbank networks and systemic importance An application to European data

In ̃aki Aldasoro† Iva ́n Alves‡

May 2015

Click to access AldasoroAlves.pdf


Control of Multilayer Networks

Giulia Menichetti1, Luca Dall’Asta2,3 & Ginestra Bianconi

Click to access srep20706.pdf


Centrality Measurement of the Mexican Large Value Payments System from the Perspective of Multiplex Networks

Bernardo Bravo-Benitez, Biliana Alexandrova-Kabadjova, Serafin Martinez-Jaramillo

Click to access 00b7d53c415e038c7d000000.pdf



Recent advances on failure and recovery in networks of networks

Louis M. Shekhtman∗, Michael M. Danziger, Shlomo Havlin

Click to access Recent%20advances%20on%20failure%20and%20recovery%20in%20networks%20of%20networks.pdf


Financial Stability and Interacting Networks of Financial Institutions and Market Infrastructures

Carlos León  Ron J. Berndsen   Luc Renneboog


The structure and dynamics of multilayer networks

S. Boccaletti,∗, G. Bianconic, R. Criadod,, C.I. del Geniof,, J. Gómez-Gardeñes, M. Romanced, Sendiña-Nadal, Z. Wang. Zaninm,


Click to access 1407.0742.pdf


A multi-layer network of the sovereign securities market

Carlos León  Jhonatan Pérez  Luc Renneboog

Click to access be_840.pdf


Growing Multiplex Networks with Arbitrary Number of Layers

Babak Fotouhi1 and Naghmeh Momeni

Click to access 1506.06278.pdf



Quantitative Finance

Special Issue on Interlinkages & Systemic Risk