Repo bankruptcy exemption carries ‘significant costs’ – paper
Apparent liquidity boost from US rule is undermined by greater risk of fire sales, authors say
Exempting repo contracts from bankruptcy stays may appear to boost liquidity but can actually undermine it over the longer term, new research finds.
Viral Acharya, V Ravi Anshuman and S Vish Viswanathan note the majority of repo contracts in the US benefit from the so-called safe-harbour provision. This means if the seller of an asset pledged in a repo is unable to repurchase it, the buyer can liquidate the collateral even if the seller enters bankruptcy.
In partial equilibrium, this ability to
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