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Importance of Securitization

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The Financial Crisis

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Run on the Repos

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The Financial Crisis

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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.

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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).