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The Role of Securitization in the Financial Crisis: Insights from Repo Markets

This analysis explores the critical role of securitization during the financial crisis, emphasizing the run on repos. It reveals that rising LIB-OIS rates, indicative of increased counterparty credit risk, contributed to widening spreads and impacted the liquidity and volatility of underlying collateral. Higher expected volatility led to larger repo haircuts, reflecting the dangers in the subprime market. The study illustrates how these factors collectively heightened uncertainty regarding bank solvency, exacerbating the crisis and mirroring characteristics of a bank run.

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The Role of Securitization in the Financial Crisis: Insights from Repo Markets

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Presentation Transcript

  1. Importance of Securitization

  2. The Financial Crisis

  3. Run on the Repos

  4. The Financial Crisis

  5. Regression Results • Roughly same results for repo spreads. • Rise in LIB-OIS (proxy for counterparty credit risk in banking system) leads to increase in spreads. • Repo haircuts depend on expected volatility in underlying collateral • More expected volatility implies larger haircuts.

  6. Implications • Problems in sub-prime market led to higher LIB-OIS. • Higher LIB-OIS lead to larger credit spreads on securitized bonds and repos. • Higher credit spreads led to more uncertainty about bank solvency and lower values for repo collateral. • Concerns about liquidity of bonds used for repo collateral led to rising repo haircuts (equivalent to a bank run).

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