Publications
Publications
- 2015
Collateral Shortages and Intermediation Networks
By: Marco Di Maggio and Alireza Tahbaz-Salehi
Abstract
This paper argues that in the presence of trading frictions and agency problems, the interbank market may be overly fragile, in the sense that small changes in the liquidity of assets used as collateral may lead to large swings in haircuts and a potential credit freeze. Our results highlight that the financial system's intermediation capacity crucially depends on the distribution of collateralizable assets among financial institutions as opposed to their aggregate amount. We also show that the interplay of agency problems and trade frictions may result in the endogenous emergence of intermediation bottlenecks that impair credit relationships. These results thus provide a novel explanation for the collapse in the secured lending market during the recent crisis.
Keywords
Financial Intermediation; Financial Networks; Secured Lending; Collateral; Repo Runs; ABCP Collapse; Networks; Negotiation; Financing and Loans; Financial Crisis
Citation
Di Maggio, Marco, and Alireza Tahbaz-Salehi. "Collateral Shortages and Intermediation Networks." Working Paper, November 2015. (Revise and Resubmit to The Review of Financial Studies.)