Repo aggregate

∗
Sizing Up Repo
Arvind Krishnamurthy † Stefan Nagel ‡
Northwestern University Stanford University
Dmitry Orlov §
Stanford University
March 2011

PRELIMINARY AND INCOMPLETE. VIEW OR PRINT IN COLOR.

Abstract
We measure the repo funding extended by money market funds and securities
lenders to the shadow banking system, including quantities, haircuts, and repo
rates sorted by the type of underlying collateral. Both the quantity and price
data suggest that there was a run on repo backed by non-Agency MBS/ABS
collateral, while the repo market for Treasury and Agency collateral was not
significantly affected. However, to gauge the consequences of such a run one
must also take into account that prior to the financial crisis only about 3% of
outstanding non-Agency MBS/ABS is financed with repo from money market
funds and securities lenders. A more sizeable contraction in short-term debt
financing of non-Agency MBS/ABS occurs with the contraction in asset-backed
commercial paper. While the contraction in aggregate repo funding with non-
Agency MBS/ABS was small relative to the outstanding stock of non-Agency
MBS/ABS, dealer banks with a larger exposure to private debt securities were
affected more strongly and resorted to the Fed’s emergency lending programs for
funding.

∗
We thank Peter Crane for providing data, and seminar participants at DePaul University, Goethe
University Frankfurt, University of Lugano, Stanford University, and University of Zurich for useful
comments.
†
Kellogg School of Management, Northwestern University, and NBER
‡
Graduate School of Business, Stanford University, and NBER
§
Graduate School of Business, Stanford University

I Introduction

Most analyses of the financial crisis of 2007-09 highlight the rapid expansion of the
shadow banking sector in the period from 2000 to 2007 and the subsequent collapse
of the sector during the crisis (see Adrian and Shin (2010), Brunnermeier (2009),
Gorton and Metrick (2011b)). A wide variety of loans, including residential mortgages,
auto loans, and credit card loans, which a decade ago were held by the commercial
banking sector and financed by bank deposits were instead held by shadow banks and
financed by repurchase agreements (repo) and asset-backed commercial paper (ABCP)
(see Figure 1). As with traditional banks, the funding structure employed by shadow
banks was short-term. However, unlike traditional banks there was no regulatory
structure that offered safety to the shadow-bank depositors. In a series of papers,
Gorton and Metrick (2010, 2011b, 2011a) have argued that the repo market played
a key role in the collapse of the shadow banking system through a “run on repo”
very much akin to the runs on commercial banks that plagued the U.S. prior to the
establishment of the Federal Reserve System.
Much of the discussion of the repo market has run ahead of our measurement of the
repo market (see Geanakoplos (2009); Gorton and Metrick (2011a); Shleifer (2010)).
Because of a lack of data, we know little about basic questions: How big is the repo
market? How much did it contract during the crisis? What type of collateral is most
commonly financed in the repo market? How did this change over the crisis? As a
consequence, it is difficult to evaluate how much of a factor the repo market run was
in contributing to the financial crisis.
This paper attempts to fill this gap with a new data set on the repo agreements
of money market funds (MMFs) complemented with data on repos of security lenders.

1

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Figure 1: Short-term Funding Flows in the Shadow Banking System

These sectors are significant lenders of cash in the repo market. For example, in
2007Q2, they lent a total of $940bn of cash in the repo market, which accounts for
about two thirds of the total repo funding that the shadow banking system obtained
from cash lenders. The MMF data is extracted from quarterly SEC filings of MMF.
The security lender data is from the Risk Management Association (RMA). We also
analyze data from the Federal Reserve’s emergency lending problems in 2008 and 2009
to understand how much these actions counteracted the run in the repo market.
Here are our five principal findings:

1. The contraction in repo in the crisis was small compared to the outstanding stock
of non-Agency MBS/ABS. In the period before the crisis, repo from MMFs and
security lenders on non-Agency MBS/ABS total $171bn, which implies that only
3% of outstanding non-Agency MBS/ABS is financed by repo from MMFs or
security lenders.

2

2. As a contrast, consider the contraction in ABCP. Both ABCP and repo are
prototypical shadow banking funding transactions: (a) the repo finances an ABS
that is held by a dealer bank or similar investor; (b) the ABCP finances a special
purpose vehicle (SPV) which holds ABS. Both of these transactions involve an
ABS that is funded by essentially risk-free short-term debt. In case (a), this
occurs by lenders setting a high enough haircut that they can be guaranteed a
riskless loan. In case (b), this occurs by a sponsoring bank offering credit or
liquidity support to the SPV (see Acharya, Schnabl, and Suarez (2010)).

In the period before the crisis, ABCP finances 22% of the outstanding non-Agency
MBS/ABS, which is an order of magnitude more than repo. In the crisis, from
2007 Q2 to 2009 Q2, there is a $1.4 trillion contraction in short-term funding of
non-Agency MBS/ABS. Of this, $662bn comes from the reduction in outstanding
ABCP while $171bn of the contraction comes from the disappearance of repo.
This data suggest that ABCP played a more significant role than the repo market
in supporting both the expansion and contraction of the shadow banking sector.
The repo market is significant, but it is a sideshow compared to the happenings
in ABCP.

3. The data suggests that there was a run on repo that was driven by money market
investors desire to avoid repo loans collateralized by risky/illiquid securities. In
particular, there is no contraction in quantity of repo of Agency and Treasury
collateral, while there is a significant contraction in the quantity of repo backed
by non-Agency ABS/MBS. There is no significant increase in the “price” terms
of repo (maturities, repo rates, haircuts) for Agency and Treasury collateral,
while there is an increase in these price-terms for repo backed by non-Agency

3

MBS/ABS. The contraction in quantity and increase in price terms is suggestive
of decreased demand for extending repo loans against non-Agency MBS/ABS.
Finally, looking at the price terms on repos done by different dealer banks, all of
the variation is captured by the variation in the underlying repo collateral, with
little to no variation due to the differences in credit risk (CDS) of the different
dealer banks. That is, there appears to have been a run on the repo backed
by non-Agency MBS/ABS rather than a generalized run on certain financial
intermediaries. However, an important caveat with our data is that we cannot
observe repo at high frequency so that we will not observe a run that occurs at
the time-scale of days.

4. While the repo contraction on non-Agency MBS/ABS appears small for the
shadow banking system, we find evidence that it played a more significant role
for some dealer banks. For Merrill Lynch, Goldman Sachs, Morgan Stanley and
Citigroup, nearly 50% of their repo transactions with MMFs prior to the crisis
were backed by non-Agency MBS/ABS and corporate debt, and almost all of this
repo from MMFs disappears in the crisis.

5. In analyzing the Federal Reserve’s programs, we find that TSLF and PDCF
absorbed much of the contraction in repo funding of non-Agency MBS/ABS and
corporate debt. Subsequently, the Maiden Lane SPVs took on a substantial
share. These programs quantitatively offset the contraction in private repo, until
they were wound down in mid-2009. The dealer banks that were funding private
collateral via repo prior to the crisis are the same ones that turn to the TSLF
and PDCF during the crisis.

These findings are consistent with the views of many commentators that there was

4

a run on the short-term debt financing that had supported the shadow banking sector
and led to its demise in the crisis. These points have been made most prominently by
Gorton and Metrick, as well as Adrian and Shin (see Gorton and Metrick (2010, 2011b,
2011a) Adrian and Shin (2010)). However, relatively speaking, the run on repo is small
which makes it hard to argue that it was the central driver of the contraction of the
shadow banking sector, contradicting the explanations of Gorton-Metrick and Adrian-
Shin. The more significant short-term debt run occurs on asset-backed commercial
paper (Acharya, Schnabl, and Suarez (2010)). The effects of the run on repo seem
most important for a select group of dealer banks who were heavy funders of private
collateral in the repo market.
Our findings shed less light on the underlying drivers of the run-up in short-term
debt financing prior to the crisis. The importance of ABCP is consistent with the
regulatory arbitrage arguments of Acharya, Schnabl, and Suarez (2010). The run-
up in both repo and ABCP is also consistent with the increased “money demand”
argument of Gorton and Metrick, or the global imbalances argument of (Caballero and
Krishnamurthy (2009)). Our data is most suited to analyze the consequences of the
contraction in repo.

The main concern with the validity of these conclusions is whether we are missing
important repo lenders and thus do not have a full picture of the repo market. In
2007Q4, our total coverage of repo from MMFs and security lenders is $1.1tn. The
Flow of Funds accounts for 2007Q4 (December 2010 release) estimates that the other
large lenders through repo were State and Local Governments ($163bn), Government
Sponsored Enterprises ($143bn), and Rest of the World ($338bn). If these Flow of
Funds estimates are correct, then our data covers about two-thirds of repo lenders.
However, because data on the repo market is scant, there is uncertainty in these Flow

5

of Funds estimates. Our own cursory investigations of other possible repo lenders has
not turned up any other significant sources of funding. In particular, while corpora-
tions were cash-rich during this period, any repo lending they do appears to be via
institutional MMFs, indicating that corporate lending is covered in our MMF sample.
The Treasury’s TIC data puts the repo lending of foreign central banks at between
$100 and $200bn (these numbers are likely incorporated in the Flow of Funds’ Rest of
the World entry).
Another specific concern is whether repo data as reported by dealer banks in filings
to the SEC and the Federal Reserve would not tell a different story. We do not use such
data. Our objective is to estimate the amount of short-term lending provided to the
shadow banking system by cash lenders outside of the shadow banking system. The
dealer bank repo data is not suitable for this purpose, because it is subject to a serious
double-counting problem.1 Suppose dealer bank A lends $1 to a hedge fund via a repo
(collateralized by $1.02 of Treasuries), and then borrows the $1 from dealer bank B via
a repo (collateralized by the same $1.02 of Treasuries), who then borrows $1 from a
MMF (collateralized by the same $1.02 of Treasuries). This chain is typical in the repo
market, and occurs commonly because collateral is rehypothecated. Note that total
repo loans across these four institutions is $3. However, the “true” repo activity in this
case is only the $1 from the MMF backed by the $1.02 of Treasury collateral that is
posted by the hedge fund; the activity along the chain between dealer bank A and B
nets out. Because dealer banks both borrow and lend cash and rehypothecate collateral
extensively, data from this sector is subject to a significant multiples problem.2 Singh
1
A double-counting problem also exists in data on tri-party repo provided by the two tri-party
agents, Bank of New York Mellon and JPMorgan Chase, and analyzed in Copeland, Martin, and
Walker (2010) from July 2008 onwards. These data include GCF repo, which is a form of inter-dealer
repo.
2
Prime brokerage is an important business for dealer banks. In this business, the dealer bank lends
cash to a hedge fund against repo collateral. The dealer bank then rehypothecates the collateral to

6

and Aitken (2010) estimate that the multiples problem was substantial, with extensive
rehypothecation of collateral between banks and dealers to take advantage of their
respective funding specialization. By focusing on entities like MMF and securities
lenders that channel cash from outside into the shadow banking system, our repo
quantity estimates are not subject to this double-counting problem.
This rationale for excluding inter-(shadow)bank repo is analogous to similar consid-
erations about interbank deposits in the calculation of the money stock M2. Interbank
deposits are not included in M2, because M2 is meant to measure the amount of
deposit funding provided by the non-bank public to the banking system. By exclud-
ing interbank deposits, M2 measures the quantity of loans to non-bank entities that
are funded by deposits from non-bank entities. Interbank deposits are analogous to
inter-(shadow)bank repo in that these loans to non-bank entities are ”rehypothecated”
(although only indirectly, because interbank deposits are unsecured, and the loans
are therefore commingled with other assets on the banks’ balance sheets) within the
banking system.
The gross size of the repo market may be relevant for other questions that are
not our focus here. For example, a high level of inter-dealer repo could aﬀect the
probability that defaults propagate from dealer to dealer in the same way as a high level
of inter-dealer over-the-counter derivatives exposures could (Duﬃe and Zhu (2010)).
Our focus, however, is not on the systemic risk contribution of inter-dealer repos but on
the importance of repo for shadow bank funding from cash lenders outside the shadow
banking system.
Related Literature: To be added.
another dealer bank (or a MMF) to raise the funds for the hedge fund loan. Dealer banks also run
an active repo book, where they buy and sell repo throughout the day. This activity also involves
rehypothecating collateral between borrowers and lenders. All of this rehypothecation as part of
regular business makes the dealer bank data uninformative about the net size of the repo market.

7

II Repurchase Agreements

We start by describing the main features of repurchase agreements that are important
for understanding our results. We then describe the Money Market Fund SEC filings
and the securities lender data that we use in the analysis. A more in-depth treatment
of the institutional features of the repo market can be found, e.g., in Duffie (1996),
Garbade (2006), and Federal Reserve Bank of New York (2010).

A Background on Repurchase Agreements

A repo involves the simultaneous sale and forward agreement to repurchase the same,
or a similar, security at some point in the future. Effectively, a repo constitutes a
collateralized loan in which a cash-rich party lends to a borrower and receives securities
as collateral until the loan is repaid. The borrower pays the cash lender interest in the
form of the repo rate. The borrower typically also has to post collateral in excess of the
notional amount of the loan (the ”haircut”). The haircut is defined as 1 − C/F with
collateral value C and notional amount F . For example, a repo in which the borrower
receives a loan of $95m might require collateral worth $100m, implying a haircut of
5%.3
Repos constitute an important funding source for dealer banks. They use repos
to finance securities held on their balance sheets (as market-making inventory, ware-
housing during the intermediate stages of securitization, or for trading purposes), or
to finance repo loans they provided to clients such as hedge funds. In the latter case,
3
An central development in the 1980s that spurred the growth of repo was that repos received
an exemption from automatic stay in bankruptcy (Garbade (2006)). This exemption allows the cash
lender in a repo to sell the collateral immediately in the event of default by the borrower without
having to await the outcome of lengthy bankruptcy proceedings, thereby reducing the counterparty
risk exposure of the cash lender.

8

dealer banks re-hypothecate the collateral they receive from hedge funds to use as col-
lateral in their repos with cash lenders. King (2008) estimates that about half of the
financial instruments held by dealer banks were financed through repos.
In the years before the financial crisis, repos became an important funding source
for the shadow banking system. Just like the traditional banking system, the shadow
banking system raised short-term funding and directed these short-term funds into
relatively illiquid long-term investments, such as corporate securities and loans, as well
residential and commercial mortgages, as illustrated in Figure 1. MMFs and securities
lenders provided a large part of this short-term funding (Pozsar, Adrian, Ashcraft, and
Boesky (2010)).
MMFs promise their investors a constant net-asset value (“$1 NAV”), which effec-
tively makes their investors’ claims similar to the demand deposits of the traditional
banking system (but without deposit insurance). Some of the funding provided by
MMF went into securitized products through vehicles that issued asset-backed com-
mercial paper (ABCP), but a significant part also went via repo to financial institutions
that held securitized products and other securities on their balance sheets.
Securities lenders are another cash-rich party that directed funds to the shadow
banking system. These institutions, as part of being custodians for a large amount
of bonds and equity, lend out these securities to investors who wish to establish short
positions in bond or stock markets. The shorting investor will typically leave cash with
the security lender equal (or greater) than the value of the securities borrowed from the
security lender. As a result, security lenders come into possession of a large amount of
cash that they seek to reinvest in the money markets. A significant share of this cash
went into repos and ABCP.

9

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Figure 2: Tri-Party Repurchase Agreements

The repo that we examine in this paper are know as tri-party repos.4 In a tri-party
repo, a clearing bank stands as an agent between the borrower and the cash lender, as
illustrated in Figure 2. In the U.S., this role is performed either by JPMorgan Chase
or Bank of New York Mellon. The clearing bank ensures that the repo is properly
collateralized within the terms that cash lender and borrower agreed to in the repo
(haircut, marking-to-market, and type of securities). The motivation for this tri-party
arrangement is to enable cash lenders like MMFs that may not have the capability
to handle collateral flows and assess collateral valuations to participate in this market
without running the risk of the counterparty might not provide the required collateral.5
The risks for a cash lender in a repo are principally that the borrower defaults
and the lender does not have sufficient collateral to recover the lent amount. For
MMFs, there is an additional concern that if the borrower defaults and the collateral
4
The other type of repo is known as a bilateral repo. A bilateral repo is typically done between
a dealer bank and a hedge fund, while the tri-party repo is done between dealer banks and MMFs.
These two contracts will have different terms in practice (repo rates and haircuts). For example, a
typical hedge fund is less credit-worthy than a dealer bank so that the bilateral repos carry higher
haircuts. Our interest in this paper centers on understanding the funding flows that enter the shadow
banking system, and hence the tri-party repo market is the relevant market, as it constitutes one of
the main interfaces between shadow banks and short-term cash lenders. For other questions, e.g., the
network of counterparty exposures among dealer banks, the bilateral repo market is important.
5
Garbade (2006) discusses incidents prior to the development of the tri-party repo market in which
borrowers had failed to properly collateralize loans.

10

is illiquid, the MMF will be stuck with the collateral for an extended period. SEC
rules place limits on the amount of illiquid/long-term securities that that an MMF
can hold. Finally, there is repo risk that is unique to the tri-party market that stems
from the so-called daily “unwind.” Irrespective of the term of the repo, the clearing
bank unwinds the repo every morning by depositing cash in the cash-lenders’ deposit
account with the custodian and by extending an intraday overdraft and returning the
collateral to the borrower for use in deliveries during the day. If the term of the repo
has not expired, or if the lender and borrower agree, bilaterally, to renew the repo, a
“rewind” takes place at the end of the business day, whereby securities are transferred
from the borrower’s to the lender’s security accounts with the clearing bank, and cash is
transferred from the cash lender’s to the borrower’s deposit accounts. Thus, the cash
lender is a secured lender overnight, with the securities underlying the repo serving
as collateral, but during the day the cash lender becomes an unsecured depositor in
the tri-party custodian.6 . Thus, the risks to a cash lender overnight stem from the
interaction of counterparty risk of the borrower (a) with risk of collateral value changes
and illiquidity of underlying collateral (b). Intraday, the risks to a cash lender stem
from the counterparty risk of the clearing bank (c).
The lender can protect against (b) by raising the haircut on the repo contract.
Reducing the amount of repo lending can be a response to all three risks. The lender
can also raise the repo rate to compensate for all three risks, although in practice this
appears to be a less signiﬁcant margin.
Finally, during the sample period we study, there was considerable uncertainty
about how a default of a repo borrower would play out in the tri-party repo market.
6
The potential systemic risk created by the huge intraday overdrafts extended by the two tri-party
custodian banks to broker-dealers have also lead to eﬀorts to change the practices in the tri-party
repo market (see Federal Reserve Bank of New York (2010)), but for the sample period we study in
this paper, the market functioned in the way we described

11

According to the Tri-Party Repo Infrastructure Reform Task Force (see Federal Reserve
Bank of New York (2010)), it was not clear for the cash investor if, when, and how
a repo trade would be unwound and how the collateral liquidation process would be
carried out. The ambiguity over these matters may also affect participation in the repo
market.

B Quantity of Tri-Party Repo Funding

Mutual funds file a portfolio holdings report every quarter on forms N-CSR, N-CSRS,
and N-Q with the Securities and Exchange Commission (SEC). This filing requirements
also extends to MMFs. The typical report of an MMF lists their holdings of certificates
of deposits, commercial paper, and repurchase agreements. For repos, the reports list
each repurchase agreement with the notional amount, repo rate, initiation date, repur-
chase date, counterparty, the type of collateral, and, in most cases, the value of the
collateral at the report date. The level of detail about the underlying collateral varies
between funds. Some report fairly detailed categories, while others only report broad
classes, such as “U.S. Treasury Bonds”, “Government Agency Obligations”, or “Corpo-
rate Bonds”, often with a maturity range. Typically a portfolio of securities serves as
collateral, but only rarely are the value-weights of different classes of securities in the
portfolio reported. In most cases, though, the collateral portfolio consists of securities
of the same type (e.g., U.S. Treasury bonds of different maturities and vintages, rather
than Treasury bonds mixed with corporate bonds or asset-backed securities).
We collect the quarterly filings from the SEC website with filing dates between Jan-
uary 2007 and June 2010. We parse the filings electronically and extract the repurchase
agreement information. Our aim is to collect the data for the 20 biggest fund money
market fund families, identified from a ranking of money market fund families at the

12

end of 2006 obtained from Cranedata. As of this writing, we have compiled data for 10
of these 20 families (see Appendix A). As the market for money market funds is fairly
concentrated, with the biggest 10 fund families accounting for more than 60% of total
net assets, data for the biggest 20 fund families should give us a fairly complete picture
of the repo market between MMF and broker-dealers. In all of the computations below,
we extrapolate the MMF data we have collected to the entire MMF sector. While we
refer to the funds in our sample in general as MMFs, some funds in the sample are
enhanced cash funds that are, strictly speaking, not money market funds, as they do
not adhere to the investment restrictions for money market funds in SEC rule 2a-7 and
particularly do not aim for $1 NAV.
To analyze securities lenders, the second main class of providers of short-term fund-
ing to shadow banks, we obtain data from the Risk Management Association (RMA).
The RMA conducts a quarterly survey of major securities lenders and reports statis-
tics on their aggregate portfolio of cash collateral reinvestments, including direct in-
vestments as well as repo agreements. Appendix B provides more detail on the data,
including a list of survey participants quarter-by-quarter. The RMA data combine
repo with non-Agency ABS/MBS and corporate debt into one category. We impute
the split between non-Agency ABS/MBS and corporate debt based on the assumption
that their relative proportion is the same as the corresponding proportion in MMF
repos.
The first column in Table I reports the aggregate amount of repos undertaken by
MMF in our sample (given the data we have collected so far). In 2006Q4 we have
only partial coverage because we miss 2006Q4 reports filed before January 2007. For
comparison, the second column shows the aggregate amount of MMF repo outstanding
according to the flow of funds accounts (FoF), and the third column shows the total

13

Table I: Summary of Money Market Funds and Securities Lenders Repo Data

Money Market Funds Securities Lenders Primary
Collected Total Total Cash Dealer
Quarter Repo Repo 2 Assets2 Repo Collateral Repo3
2006Q41 144 395 2312 431 1594 3442
2007Q1 210 387 2372 527 1834 3619
2007Q2 213 426 2466 504 1902 3889
2007Q3 274 528 2780 522 1754 3886
2007Q4 298 606 3033 478 1712 4106
2008Q1 323 592 3383 467 1537 4278
2008Q2 281 518 3318 509 1790 4222
2008Q3 273 592 3355 490 1519 3989
2008Q4 287 542 3757 228 954 3208
2009Q1 375 562 3739 212 779 2743
2009Q2 345 488 3585 257 882 2582
2009Q3 334 495 3363 244 865 2499
2009Q4 351 480 3259 229 850 2469
2010Q1 308 440 2931 263 837 2477

1
Incomplete coverage of funds in MMF sample in 2006Q4.
2
Source: Flow of Funds Accounts.
3
Source: Federal Reseve Bank of New York

amount of MMF assets, also from the FoF. Currently, our data set covers roughly
60-70% of oustanding MMF repo. Repos account for about 15-20% of total MMF
assets.
Column four reports the total amount of repo oustanding in securities lenders’ cash
collateral reinvestment portfolios. Until 2008Q2, this number is of comparable magni-
tude as the total amount of MMF repo, but it contracts more strongly in subsequent
quarters. This is likely driven by the fact that securities lenders’ total cash collateral
available for reinvestment contracted sharply around the peak of the crisis.
The ﬁnal column shows the end-of-quarter amount of total Primary Dealer repos
outstanding, as reported by the Federal Reserve Bank of New York. A comparison of
these numbers with the total amount of MMF repo in the second column shows an

14

interesting and stark contrast. While the amount of Primary Dealer repo outstanding
contracted by 40% between 2008Q2 and 2009Q2, the amount of MMF repo did not
shrink appreciably until 2009Q1. One factor driving the total size of MMF repo seems
to be the flows in and out of MMF. MMF assets increased by about 50% from 2007Q1
to 2009Q2. Only when MMF assets started to shrink in 2009Q2 did the amount of
MMF repo start to shrink substantially as well. A second possible explanation for
this discrepancy has to do with the extent of rehypothecation which we have described
before. If dealers netted their repos over this period, perhaps to reduce network ex-
posures to vulnerable dealers, then the primary dealer data will show a drop in repo
outstanding. Anecdotal evidence suggests that that this latter effect may have been
significant in the crisis.
To what extent does our MMF and securities lender data capture the total amount
of repo funding provided to the shadow banking system? According to data from
Bank of New York Mellon and J.P. Morgan, the total amount of tri-party repo was
roughly $2.5 trillion at the end of 2007 (Federal Reserve Bank of New York (2010)),
which compares with about $1.1 trillion of MMF and securities lender repo in our data.
However, the Bank of New York Mellon and J.P. Morgan numbers also include GCF
repo, which is a form of inter-dealer repo (see Copeland, Martin, and Walker (2010)).
The Flow of Funds Accounts (December 2010 release) suggest that the major cash
lenders in the repo market apart from MMF and securities lenders at the end of 2007
include state and local governments with ($163.3bn), government sponsored enterprises
($142.7bn) and rest of the world ($338.4bn). These numbers suggest that our MMF
and security lender data captures about two thirds of the repo funding provided to the
shadow banking system.

15

C Collateral used in Tri-Party Repo Funding

Figure 3 presents the share (by notional value) accounted for by different collateral
categories, reported for each quarter. The “Agency” category includes both Agency
bonds and Agency-backed MBS (many funds lump these together when reporting col-
lateral, so we cannot distinguish them in most cases). The “Priv. ABS” category
includes private-label MBS and ABS. The “Corporate” category refers to corporate
debt, and the “Other” category is composed mainly of equities, whole loan repos, and
some commercial paper, certificates of deposit, and municipal debt.
In general, Treasury and Agency securities account for the majority of collateral in
MMF repos. Private-label MBS/ABS make up around 10% of MMF repo collateral
prior to the crisis, which corresponds to about $60 billion in terms of value. Private-
label ABS/MBS disappears as collateral from MMF as the financial crisis reached its
peak in 2008. Corporate debt also disappears almost entirely. Thus, riskier and less
liquid collateral were not used for financing in the tri-party repo market. This reflects
the “run on repo” that many have commented on.
For the security lenders, non-Agency ABS/MBS and corporate debt make up a
much larger fraction of the portfolio, while Treasuries make up only a small portion.
However, we observe the same pattern of a reduction in the share of riskier and less
liquid collateral during the crisis. The disappearance of private credit instruments as
collateral is less extreme, though, than for MMF.

16

1
.8
.6
Share
.4

2007q1 2008q1 2009q1 2010q1
Quarter

U.S. Treasury Agency Priv. ABS
Corporate Other
1
.8
.6
Share
.4
.2
0

2007q1 2008q1 2009q1 2010q1
Quarter

U.S. Treasury Agency Priv. ABS
Corporate Other

Figure 3: Share of Collateral Types for Money Market Fund Repo (top) and Securities
Lender Repo (bottom). The RMA data for securities lenders combines corporate and
private-label ABS collateral. The split shown in this ﬁgure is imputed based on the
assumption that the relative proportion of corporate and private-label ABS collateral
is the same as for MMF.

17

III Short-term Funding of Private Credit Instru-

ments

This section documents the sources of funding of private credit instruments to evaluate
the relative importance of different funding sources. We particularly focus on the
importance of ABCP vis-a-vis repo to fund non-Agency MBS and ABS.

A Short-term funding at the Onset of the Financial Crisis

The first row of Table II presents data on the total outstanding U.S. non-Agency
MBS/ABS in 2007Q2. The $5.275tn outstanding is the heart of what is commonly re-
ferred to as the shadow-banking sector; i.e., residential mortgages and other loans that
are held in securitization pools or in SPVs. The main sub-categories in the $5.275tn are
roughly $3 trillion non-Agency RMBS and CMBS (data from the Securities Industry
and Financial Market Association), which include about $1.4 trillion subprime RMBS
outstanding at the onset of the crisis (Greenlaw, Hatzius, Kashyap, and Shin (2008)).
We also provide data on the outstanding corporate bonds as some of these securities
(e.g., bonds used to finance LBOs, senior bank loans) also comprise the shadow bank-
ing sector. The outstanding amount of corporate debt, excluding commercial paper,
was $5.591 trillion in 2007Q2.
The table also details the amount of these securities financed by repo. Total repo
of non-Agency MBS/ABS is $171bn. Even if we include the repo extended against
corporate bonds, the repo total is only $386bn. This is a small fraction of the out-
standing assets of shadow banks. This observation underscores a principal finding of
this study: repo was of far less importance in funding the shadow-banking sector than
is commonly assumed.

18

Table II: Funding of Outstanding U.S. Non-Agency MBS/ABS and Corporate Bonds
in 2007Q2

Non-Agency MBS/ABS Corporate Bonds
Amount % Amount %

Total outstanding1 5275 100% 5591 100%

Short-term funding
ABCP2 1173 22%
Direct holdings3
MMF 243 5% 179 3%
Securities lenders 502 10% 369 7%
Repo4
MMF 44 1% 56 1%
Securities lenders 127 2% 159 3%
Total short-term 2089 40% 763 14%

1
Souce: SIFMA for MBS/ABS, where ABS is ex CDOs (assuming CDOs are largely repackaged
ABS); Flow of Funds for corporate bonds, ex bonds issued by foreigners and ABS issuers.
2
Source: Federal Reserve Board.
3
Source: Risk management Association (RMA) for securities lenders, and Flow of Funds for total
direct holdings by MMF of corporate bonds including ABS. The direct holdings estimate for MMF is
based on the assumption that the ratio of non-Agency MBS/ABS holdings to corporate bonds is the
same for MMF as the observed one for securities lenders.
4
RMA (securities lenders) and SEC ﬁlings (MMF). The MMF repo numbers from our SEC ﬁlings data
are scaled up to match the total amount of MMF repo according to the Flow of Funds. The RMA data
combines repos with corporate and non-Agency MBS/ABS collateral. The repo estimate for securities
lenders is based on the assumption that the share of repos with non-Agency MBS/ABS to repos
with corporate debt securities collateral is the same for securities lenders as the observed one for MMF.

19

If repo was not the principal source of funding, what was? The table details the
direct holdings of these securities by MMFs and security lenders. The direct holdings
are substantial, totaling $745bn. It is likely that such holdings are high grade and
short maturity tranches of securitization deals. The largest source of funding is ABCP
of $1173 bn. Acharya, Schnabl, and Suarez (2010) note that the assets in the SPVs
financed by ABCP are a 50-50 mix of ABS and other loans (receivables or whole bank
loans). Nevertheless, as they point out, one can think of ABCP as part of a securiti-
zation chain where commercial paper is issued against loans and other securities. The
comparison between ABCP and repo shows that ABCP was probably more important
as a stress-point for the shadow banking system.

B Contraction in short-term funding during the financial cri-

sis

Table III documents the contraction in funding of the shadow banking sector between
2007Q2 and 2009Q1. Total repo for non-Agency MBS/ABS goes to zero. However, as
we have noted the quantity of contraction is modest since repo was a relatively small
source of funding. The contraction in repo funding accounts only for less than 15% of
the total short-term funding contraction of roughly $1.4 trillion.
A striking fact is that repo with non-Agency MBS/ABS collateral completely dis-
appears. Thus, even though the total contraction is small, it seems possible that
institutions that were entirely reliant on repo were particularly affected by the reduc-
tion in repo. We return to this point later in the paper. For example, this observation
may square with accounts of the failures of Bear Stearns and Lehman Brothers (see
Duffie (2010)).

20

For the entire shadow bank sector though, the more important contraction was in
ABCP, which falls by $662bn. Direct holdings of MBS/ABS by MMFs and security
lenders also falls by $568bn. The bottom panel of the table documents the contraction
in corporate bonds. The contraction is more modest, and this is likely driven by the
fact that the corporate bond category mixes in securities which are not of interest (e.g.,
Aaa corporate bonds).
Figure 4 illustrates the contraction in ABCP and repo graphically, quarter-by-
quarter. The ﬁgure compares the amount of repo with private-label ABS/MBS collat-
eral with the amount of ABCP outstanding (data obtained from the Federal Reserve
Board), net of the amount funded through the Federal Reserve’s Commercial Paper
Funding Facility (see Adrian, Kimbrough, and Marchoni (2010)). The contraction in
ABCP starts earlier than that of repo and continues steadily through the crisis. The
repo contraction occurs in a small window around 2008 Q1, roughly corresponding to
the failure Bear Stearns. It is also worth noting that the contraction in repo with
non-Agency MBS/ABS starts later than ABCP. Thus, the repo market does not seem
to be the place where the initial cracks in the shadow banking system appeared.

C Demand or Supply?

One thorny issue to sort out from this data is whether or not the contraction in out-
standing volumes was driven by supply forces or demand forces. That is, one interpre-
tation of this data is that cash-investors including MMFs and security lenders change
their portfolios to avoid MBS/ABS repo and ABCP (”repo demand”). But it is also
possible that hedge funds and dealer banks (”repo supply”), motivated by the increased
risk and uncertainty in asset markets, chose to reduce their holdings of securities and
hence no longer needed funding from the repo markets.

21

Table III: Contraction in Short-term Funding

2007Q2 2009Q1 Contraction

Non-Agency MBS/ABS
ABCP1 1173.2 511.0 -662.2
Direct holdings
MMF3 243.3 59.4 -183.9
Securities lenders2 501.6 116.0 -385.6
Repo
MMF 44.3 0.0 -44.3
Total -1402.5

Corporate bonds
Direct holdings
MMF3 178.9 158.4 -20.5
Securities lenders 368.7 309.1 -59.6
Repo
MMF 55.9 9.2 -46.7
Total -235.1

1
Source: Federal Reserve Board. ABCP outstanding less the amount of ABCP ﬁnanced through the
Commercial Paper Funding Facility ($116.8bn in 2009Q1).
2
Part of these holdings is in the form of ABCP, part in direct holdings of long-term ABS (i.e.,
possible double-counting with ABCP)
3
The direct holdings estimate for MMF is based on the assumption that the ratio of non-Agency
MBS/ABS holdings to corporate bonds is the same for MMF as the observed one for securities
lenders.
4
Risk management Association (RMA) and SEC ﬁlings (MMF). The RMA data combines
repos with corporate and non-Agency MBS/ABS collateral. The repo estimate for securities
lenders is based on the assumption that the share of repos with non-Agency MBS/ABS to repos
with corporate debt securities collateral is the same for securities lenders as the observed one for MMF.

22

1500

250
1200

Repo w/ non−agency MBS/ABS
200
ABCP outstanding
900

150
600

100
300

050
2006q3 2007q3 2008q3 2009q3 2010q3
Quarter

ABCP outstanding Repo w/ non−agency MBS/ABS

Figure 4: Comparison of non-Agency ABS/MBS repo with ABCP outstanding (ex
CPFF)

The quantity data is suggestive of a demand contraction (we discuss the price data
in the next section). First, the outstanding amount of securities in SPVs backing ABCP
was essentially ﬁxed over this period. That is, banks sponsored the SPVs, ﬁlled them
with loans and securities, and issued ABCP and other claims against them, letting
them wind down as the loans and securities matured. The banks were not taking an
active decision to increase or decrease the loans/securities in the SPV. Thus, at least
for ABCP, it is likely that all of the action is driven by demand forces. Since for an
MMF or security lender ABCP and repo are close substitutes, it is likely that the desire
to not own ABCP is mirrored in a desire to not own repo. Thus, it is likely that the
contraction in repo is also driven by demand forces.
Second, the fact that repo quantity goes to zero also suggests that demand was at
work. While dealer banks and hedge funds reduce their holdings of ABS/MBS over this

23

period (see He, Khang, and Krishnamurthy (2010)), they did not reduce their holdings
to zero.
Last, flows into money market funds provide another indication that the contrac-
tion was driven by demand-side effects. From September to December 2008, taxable
government money market funds received inflows of $489 billion while taxable non-
government money market funds experienced outflows of $234 billion (data from the
Investment Company Institute). Thus, part of the reduction in repo of non-goverment
securities, and the increase in repo with government securities may have been driven
by investors’ reallocation between money market funds that invest only in government
securities and other money market funds.

IV Repo Terms During the Financial Crisis

This section presents data on the evolution of the terms of repo contracts, including
repo rates, haircuts, and repo maturities. The analysis is based on the MMF repo
data. The data we present suggests that “price” of repo borrowing rose over the crisis.
In conjunction with the quantity evidence, the results further suggests that a central
factor driving repo market dynamics in the crisis was the desire of cash lenders to avoid
lending against MBS/ABS collateral. The data on the change of contract terms also
suggest that it is a combination of risk-aversion and illiquidity aversion that drives cash
lender behavior.

A Maturity Compression

Figure 5 illustrates the shortening in the maturity structure of repos over the crisis.
In general, the majority of repo contracts are overnight. In equal-weighted terms

24

(a) Equally weighted

200 150
Maturity (business days)
50 100
0

2006q3 2007q3 2008q3 2009q3 2010q3
Quarter

90th 80th 70th 60th

(b) Weighted by notional value
250 200
Maturity (business days)
100 50
0 150

2006q3 2007q3 2008q3 2009q3 2010q3
Quarter

99th 98th 95th 90th

Figure 5: Percentiles of Repo Maturities

25

(top panel), the 90th percentile reached close to 200 business days in 2007, but it
subsequently shrank to less than two months. In value-weighted terms (bottom panel),
the figure shows a similar pattern, but the maturity compression is more concentrated
in the tail similar since the overwhelming majority of large repos are overnight. The
reduction in maturity is consistent with an increased demand for liquidity from cash-
investors, since shorter maturity repo is de-facto more liquid than longer maturity repo.
Krishnamurthy (2010) provides evidence of investors’ increased desire for liquidity over
the crisis, as reflected in a number of different asset markets. That is, the data in Figure
5 is reflective of a more general phenomena that played out over the crisis.

B Haircuts

Figure 6 plots the value-weighted average haircuts for different categories of collateral
over the sample period. Since MMF file at different month-ends throughout each
quarter, we can calculate these averages at a monthly frequency. The line for private-
label MBS and ABS has a gap from late 2008 to late 2009, as this type of collateral
completely disappeared during this period (see Figure 3). It is apparent that haircuts
for non-Treasury and non-Agency collateral increased substantially from 2007 to 2010,
for example from around 3-4% to about 5-7% for corporate debt and private-label
MBS and ABS. The similarity of haircut time patterns for private-label ABS and for
corporate bonds also suggest that the problem was more generalized and not something
specific to mortgage assets. All of these patterns are suggestive of cash-investors desire
to avoid risk/illiquidity in their repo loans.
An important observation from this data is that the patterns in haircuts that we
observe in the tri-party repo market appear different from the bilateral repo haircuts
reported in Gorton and Metrick (2011b). First, while in their data average haircuts

26

are frequently zero in 2007 for corporate debt and securitized products, the repos
undertaken by MMF in our data always have average haircuts of at least 2%, even for
Treasuries and Agency debt. Second, although our value-weighted averages (which is
the most relevant measure of aggregate funding conditions) are difficult to compare
with the equal-weighted averages in finer categories reported in Gorton and Metrick
(2011b), an informal comparison suggests that haircuts in tri-party repos of MMF
increased much less than the haircuts in their bilateral repo data (Gorton and Metrick
report average haircuts in excess of 50% for several categories of corporate debt and
securitized products).
Taken together with our findings of the relatively small amounts of MMF repos
against private-label MBS and ABS collateral, these observations suggest that the
“run on repo” may have had a more modest effect on aggregate funding conditions for
the shadow banking system than what one may guess from the enormous increase in
haircuts for securitized products in the bilateral repo market as reported by Gorton
and Metrick (2011b).
Finally, there are some surprising patterns in this data. First, the increase in
haircuts does not revert following the peak of the financial crisis in 2008. Haircut
levels in 2010 are still as high, or even higher than at the end of 2008. Second, even
though there was a pronounced shift away from Agency collateral towards Treasuries
(in terms of the relative shares shown in Figure 3) before Fannie Mae and Freddie
Mac were placed in conservatorship in 2008Q3, average haircuts for Agency collateral
remained the same as those for Treasury obligations.

27

7
6 5
Percent
43
2

2006m7 2007m7 2008m7 2009m7 2010m7
Month

U.S. Treasury Agency
Priv. ABS Corporate

Figure 6: Haircuts by Collateral Type (weighted by notional value)

C Repo Rates

Figure 7 presents time-series of value-weighted average overnight repo rates (weighted
by notional amounts). As a benchmark for comparison, we use the Federal Funds rate
as a default-free rate proxy.7
As shown in Panel (a) of Figure 7, the average overnight repo rate for Treasury
collateral typically tracks the fed funds rate quite closely, but there are some striking
deviations. Starting in 2007, the repo rate on Treasuries drops below the fed funds rate.
This wedge reaches a maximum of almost 100bps in 2008Q1. It is apparent that Trea-
suries as a class represented preferred collateral, and as Treasury collateral was scarce,
the repo rates on this collateral fell substantially below other risk-free benchmarks.
7
The fed funds rate is an overnight rate and as such almost free of default risk.

28

(a) Average Overnight Treasury Repo Rate and Fed Funds Rate

6
4
Percent
2
0

2006m7 2007m7 2008m7 2009m7 2010m7
Month

Fed Funds Rate Treasury Repo Rate (vw.)

(b) Average Overnight Repo Rate in Excess of Overnight Treasury Repo Rate
6
4
Percent
2
0

2006m7 2007m7 2008m7 2009m7 2010m7
Month

Agency Priv. ABS
Corporate

Figure 7: Average Repo Rates (weighted by notional value)

29

Note that the repo rate here is the general collateral repo rate and not the “special”
collateral repo rate as discussed in Duffie (1996). Indeed, this evidence is more con-
sistent Krishnamurthy and Vissing-Jorgensen (2010) who argue that Treasuries as a
class, command a collateral/liquidity premium. Fleming, Hrung, and Keane (2009)
investigate the low Treasury repo rate phenomenon in detail and show that the im-
plementation of the Term Securities Lending Facility (TSLF) in March 2008, in which
the Federal Reserve lent Treasury securities against non-Treasury collateral, helped to
reduce the repo premium on Treasuries.
There is substantial variation in the repo rate by category of collateral, as evidenced
in Panel (b) of Figure 7. The spread between Treasury repo rates and the repo rate
for Agency debt, corporate debt, and private-label MBS/ABS increased from close
to zero in 2007 to roughly 200bps in 2008Q1. The higher rates are consistent with
cash investors desire to avoid lending against risky/illiquid collateral and scarcity of
Treasury collateral. The spread drops after the introduction of the TSLF in March
2008, but it spikes again in September 2008 following the collapse of Lehman Brothers.
Private-label MBS/ABS collateral was absent at that time, but a small volume of repo
transactions with corporate debt collateral took place at an average repo rate spread
to Treasury collateral of around 600bps. Repo rates for Agency debt increased much
less to roughly 100bp.
A final observation from this data is that unlike haircuts in Figure 6, these repo
rate spreads have reverted to near pre-crisis levels as financial markets normalized in
2009 and 2010. It is puzzling that quantities and haircuts on some asset classes have
continued to reflect stress conditions. A possible explanation is that market partici-
pants’ assessment of the risks of private debt instruments was permanently changed by
the financial crisis.

30

V Cross-sectional Patterns by Repo Counterparty

As the above analysis has shown, the main problem with repo financing during the
financial crisis was the difficulty of funding riskier/illiquid private debt instruments such
as private-label MBS/ABS and, to a lesser extent, corporate debt securities. However,
because repo is small in aggregate, it only played a minor role in financing shadow
bank holdings of these private debt securities.
While repo was a sideshow in terms of aggregate short-term financing, it may have
played a larger role in the troubles of certain dealer banks during the financial crisis.
Some dealer banks may have had higher exposures than others to private debt instru-
ments, and therefore suffered more from the run on repo with risky/illiquid collateral.
Second, some dealer banks may have been perceived as more prone to default than
others, which may have led cash lenders to run on repo of these banks, irrespective of
the type of collateral offered. To shed light on these possibilities, we examine how the
contraction in repo funding with private collateral played out in the cross-section of
counterparties, and whether different counterparties faced different repo terms (hair-
cuts, repo rates) around the peak of the financial crisis. Since we only have cross-
sectional data by counterparty for MMF repos, but not for securities lender repos, a
caveat is that the following analysis only captures a partial picture of the total repo
funding of dealer banks from cash lenders.

A Changes in Repo Quantities by Counterparty

Banks that were most reliant on repo funding for private collateral in the pre-crisis
period should be expected to have been more affected by the crisis. In particular,
we focus on banks’ reliance on private collateral repo funding just prior to the rescue

31

of Bear Stearns in March 2008. Since each MMF files holdings reports only every
three months, it only makes sense to consider repo funding amounts per counterparty
summed over three month windows.8 Thus, for each counterparty, we calculate the
pre-Bear Stearns (BSC) amounts of repo with different collateral types by summing
MMF repos over the three months from December 2007 to February 2008. The latter
date is when repo funding with private collateral starts to contract (see Figure 4).
Figure 8 shows how repo funding contracted or expanded for each repo counterparty
in our data from the pre-BSC period to the post-Lehman (LEH) period, where the
change is expressed as a fraction of each counterparty’s total repo funding from MMF
in the pre-BSC period. Bear Stearns and Lehman are not included in this plot, as we
cannot compute their post-LEH repo funding, but further below we will show data on
their private collateral shares in the pre-BSC period. The top panel plots the change
in total Repo funding against the pre-BSC private collateral share. The figure shows
that there was substantial heterogeneity in reliance on private debt instruments as repo
collateral. Mizhuo (MFG), Royal Bank of Scotland/Greenwich (RBS), and Barclays
(BCS) have private collateral shares of close to zero, while Merrill Lynch (ML), Morgan
Stanley (MS), Goldman Sachs (GS), and Citigroup (C) have private collateral shares
of almost 50%. The change in total repo funding from the pre-BSC to the post-LEH
period is negatively correlated with the private collateral share in the pre-BSC period.
Total repo funding expanded for most counterparties, but it contracted for many of
those that had relatively high private collateral shares before the financial crisis reached
its peak. The next two panels break the change in total repo funding into the change
in repo funding with Treasury and Agency collateral (middle) and the change in repo
8
Otherwise one would run into the problem that a counterparty might finance Treasuries with one
MMF that files the holdings, say, at the end of February and private-label MBS with a different MMF
that files holdings at the end of January. Looking at the repo funding amounts in February would
yield a misleading picture in this case.

32

Total Repo

Change Pre−BSC to Post−LEH
1.5
bcs
jpm
bnpqy
bac

1
mfg

.5
hbc
drb
ms
rbs

0
db cs

−.5 ubs
mer
gs
c
0 .1 .2 .3 .4 .5
Private Collateral Share Pre−BSC

Repo w/ Treasury/Agency Collateral
Change Pre−BSC to Post−LEH
1.5

bcs jpm
bac
1

bnpqy
mfg
hbc drb
.5

ms

rbs db cs
0

mer
ubs
gs
c
−.5

0 .1 .2 .3 .4 .5
Contraction Pre−BSC to Post−LEH

Repo w/ Private Collateral
.5 1 1.5

bnpqy
mfg bcs
0

rbs
db
hbc drb cs
jpm
ubs bac
ms
cmer
−.5

gs

0 .1 .2 .3 .4 .5

Figure 8: Contraction/Expansion in MMF Repo from Pre-Bear Stearns (Dec. 07 to
Feb. 08) to Post-Lehman (Sep. 08 to Nov. 08). Change expressed as Share of Total
MMF Repo in Pre-Bear Stearns (Dec. 07 to Feb. 08).

33

1000
ms

5−yr Senior CDS Rate Post−LEH (9/30/2008)
800
bsc

leh
600

gs
400

mer
hbc
rbs c
ubs
bcs
200

db
jpm cs bac
drb
bnpqy
0

0 .1 .2 .3 .4 .5

Figure 9: CDS Rates on September 30, 2008 and Private Collateral Share in MMF Repo
during the Three Months Prior to Bear Stearns Rescue (December 2007 to February
2008). Bear Stearns and Lehman Brothers CDS rates in this plot are the maximum
CDS rates prior to rescue/failure. The regression line has a slope of 835.0322 with
t-statistic 2.23.

funding with private collateral (bottom). They show that the change in total repo
funding has two drivers: (a) repo funding with Treasury and Agency collateral expands
for most counterparties, except those with high pre-BSC private collateral shares; (b)
repo with private collateral disappears almost completely for all counterparties (which
leads to a regression slope of approximately -1.0 in the bottom panel).
Figure 9 shows that the counterparties with highest private collateral shares in the
pre-BSC period are also more likely to be among those that had the highest perceived
default risk around the peak of the ﬁnancial crisis, as measured by the 5-year CDS
rate on senior debt on September 30, 2008. To illustrate where Lehman and Bear
Stearns were in terms of their private collateral share, the plot also includes these two
counterparties with their CDS rate set to the maximum value attained at any time

34

prior to the rescue or bankruptcy.
Even though those counterparties with the highest pre-BSC private collateral shares
were perceived as most at risk to default at the end of September 2008, Figure 8 shows
that these counterparties did not generally reduce the amount of repo with Treasury
and Agency collateral. Morgan Stanley, the counterparty with the highest perceived
default risk at the end of September 2008 and the highest private collateral share in the
pre-BSC period, even increased its amount of repo funding with Treasury and Agency
collateral substantially. While these findings are subject to the caveat that we only
observe MMF repos, and not repos with securities lenders and other cash providers,
they are suggestive that repo funding with high-quality collateral remained available
even for dealer banks with high perceived default risk.
Some accounts of the failure of Bear Stearns and Lehman suggest that these banks
did indeed experience difficulty in rolling over repo on all forms of collateral, but only
in the last days before failure. This is not captured in our low-frequency MMF repo
data. Copeland, Martin, and Walker (2010) present daily data on Lehman’s tri-party
repo book in September 2008 and document that the total amount of repo funding
started to contract substantially only a few days prior to Lehman’s bankruptcy filing,
and the contraction affected all collateral categories, including Treasury collateral.

B Repo Terms by Counterparty on September 30, 2008

Funding difficulties of dealer banks with high perceived default risk, even if not apparent
in repo quantities, could also manifest themselves as a worsening of the price-terms of
repo agreements. For this reason, we also examine cross-sectional variation in haircuts
and repo rates of different counterparties and find that most of the variation is due to
the type of collateral rather than the credit risk of counterparties. This finding further

35

reinforces our conclusion that the patterns of increasing haircuts underlying Figure 6
are driven by characteristics of collateral and not the worsening of the credit risk of
repo borrowers. We again focus our analysis on the end of September 2008, the time
when dealer banks faced the most adverse funding conditions.
For the purpose of this analysis, we refine our categorization of collateral to deal
with some ambiguity in classification of collateral as Treasury or Agency collateral.
We create an additional mixed Treasury/Agency category for cases in which we cannot
cleanly classify the collateral as Treasury or Agency securities. This includes cases, for
example, in which the collateral is a portfolio of Treasury and Agency securities. In
these cases, we had so far assigned the collateral type that has the highest number of
counts in the list of securities comprising the collateral portfolio. But this means that
some variation in repo rates within a category could be driven by collateral portfolio
composition rather than the characteristics of the repo counterparty. This ambiguity
is not significant when Agency and Treasury collateral commands very similar terms
in repos, but on September 30, 2008 it matters. We further put all non-Treasury, non-
Agency collateral into a private collateral group. On September 30, 2008, this group
includes almost exclusively corporate bonds or corporate equities.
The top graph in Figure 10 plots the (value-weighted) average haircuts of each
counterparty, against the CDS rate for 5-year senior debt on September 30, 2008. It is
apparent from these figures that average haircuts vary by collateral type, but within
collateral categories, they are virtually identical for different counterparties, irrespective
of the CDS rate. The bottom graph plots the (value-weighted) repo rate against the
CDS rate. While there is some variation in repo rates within collateral categories, this
variation is not correlated with the CDS rate of the counterparty.

36

Haircuts

5
4
Haircut
3
2

0 200 400 600 800 1000
5−yr Senior CDS Rate 9/30/2008

Treasury Treasury/Agency
Agency Private

Repo Rates
8
6
Repo Rate
4 2
0

0 200 400 600 800 1000
5−yr Senior CDS Rate 9/30/2008

Treasury Treasury/Agency
Agency Private

Figure 10: Overnight Repo Rates and Haircuts on September 30, 2008. Value-weighted
averages per counterparty

37

VI Federal Reserve Programs

In the period beginning Q2 2008, the Fed initiated a series of funding programs intended
to offset the reduction in private sector funding of the shadow banking sector. This
section presents data to shed light on the extent to which these program did in fact
offset the private contraction. We also compare the terms of the Fed facilities versus
market terms. The latter comparison is interesting because it speaks to the extent of
subsidy that the Fed offered through its programs.

A Quantity of Fed Funding

We focus on four principal programs:

1. PDCF (Primary Dealer Credit Facility), March 2008: Loan facility that provided
funding to primary dealers in exchange for any tri-party-eligible collateral. Loans
were overnight, and made at the primary credit discount rate.

2. TSLF (Term Securities Lending Facility), March 2008: Facility to loan Treasuries
from the Fed’s portfolio in exchange for any tri-party-eligible collateral. Loans
were 28-day, and rates were set in an auction.

3. Maiden Lane, 3 facilities, various dates: Fed made loans to SPVs that held non-
Agency ABS. Facilities were set up in conjunction with interventions in Bear
Stearns and AIG.

4. CPFF (Commercial Paper Funding Facility), October 2008: Fed made loans to
an SPV to purchase 3-month ABCP.

Figures 11 aggregates the non-Agency MBS/ABS repos of security lenders and
MMFs along with the funding on these securities that came from the Fed through

38

250
200
Amount ($bn.)
100 50
0 150

2006q3 2007q3 2008q3 2009q3 2010q3
Quarter

Repo Maiden Lane
TSLF PDCF

Figure 11: Repo and Federal Reserve (TSLF and PDCF) funding of non-Agency
MBS/ABS

PDCF, TSLF, and Maiden Lane.9 The figure shows that Fed program offset a consid-
erable portion of the contraction in repo funding starting in 2008Q1. As a result, total
funding smoothly decreases during the subsequent quarters.
Figure 12 presents the same data for corporate bond repos. The Fed programs were
used much less in this case. But, the private sector funding contraction is also not as
severe.
Figure 13 presents the data for ABCP. Again, the private sector funding contraction
was not as dramatic and the CPFF was not as used. We should also add that a
significant portion of the assets from the ABCP funded SPVs were taken back onto
commercial bank balance sheets. Commercial banks had access to alternative funding
sources including FDIC insured bank deposits and FDIC insured bond issues (see He,
Khang, and Krishnamurthy (2010)). With such alternatives it may be that the CPFF
9
Security lender repo split between corporate debt securities and non-Agency MBS/ABS calculated
under the assumption that the split (in terms of percentage) is the same as for MMF repos.

39

300
250
100 150 200
Amount ($bn.)
50

2006q3 2007q3 2008q3 2009q3 2010q3
Quarter

Repo TSLF
PDCF

Figure 12: Repo and Federal Reserve (TSLF and PDCF) funding of corporate debt
securities
1200
1000 800
Amount ($bn.)
400 600

2006q3 2007q3 2008q3 2009q3 2010q3
Date

ABCP ex CPFF ABCP in CPFF

Figure 13: ABCP oustanding (ex CPFF) and Federal Reserve (CPFF) funding

40

was not as needed as the facility directed to dealer banks.

B Fed Program Participation, by Dealer Bank

Where did the dealers with high pre-BSC private collateral shares turn for ﬁnancing?
Column (2) in in Table IV shows that part of the answer is that the Fed provided the
funding through the TSLF. In schedule 2 TSLF auctions, dealer banks could bid with
investment-grade securities as collateral to obtain Treasury securities on loan against
a fee. The dependent variable in column (2) measures the extent to which a dealer
bank utilized the maximum amount that it was allowed to borrow under schedule 2
in the two schedule 2 auctions, just before and after 9/30/08 (9/25/08 and 10/1/08).
For each auction, we take the ratio of the loan amount awarded to a dealer bank to
the maximum possible award, and we average this ratio across the two auctions. As
the regression results show, dealer banks with a high private collateral share prior to
the Bear Stearns rescue (pre-BSC, December 2007 to February 2008) tend to max
out their borrowing capacity under schedule 2. As the regression in column (1) shows,
they do not do so for schedule 1 auctions, presumably because they do not have enough
qualifying Treasury and Agency collateral to begin with.
The regressions in columns (1) and (2) also show that dealer banks with a high
Agency collateral repo share in the pre-BSC period tended to max out their borrowing
capacity under both schedules in the TSLF. Moreover, column (3) shows that the total
amount of borrowing under the TSLF on 9/30/08 is positively related to both Agency
and private collateral shares in the pre-BSC period. Thus, only dealer banks with
high pre-BSC Treasury collateral shares did not resort much to the TSLF (which is
sensible, as the purpose of the TSLF was to exchange non-Treasury collateral against
Treasuries).

41

Table IV: Fed Program Utilization by Primary Dealers in September 2008
For each dealer bank, we have two explanatory variables: Agency share pre-BSC is the proportion
of MMF repos with Agency collateral in the three-month period prior to the rescue of Bear Stearns
(December 2007 to February 2008). Private share pre-BSC is the share of corporate debt, non-
Agency MBS/ABS, and other non-Treasury, non-Agency collateral in the pre-BSC period. Dependent
variables are deﬁned as follows: For the TSLF, maxout1 denotes average utilization of maximum
available borrowing under TSLF schedule 1 (Treasury and Agency collateral) in the two schedule 1
auctions closest to 9/30/08 (9/18/08 and 10/2/08), maxout2 is deﬁned accordingly as the average
utilization in schedule 2 auctions (9/25/08 and 10/1/08), while Total refers to the total notional
amount of Treasury securities borrowed from the TSLF (in $bn) on 9/30/08. PDCF Total is the total
amount borrowed from the PDCF (in $bn) on 9/30/08. We report t-statistics in parentheses.

TSLF PDCF
maxout1 maxout2 Total Total
(1) (2) (3) (4)

Agency Share pre-BSC 1.56 0.69 43.84 2.66
(3.31) (1.80) (2.95) (0.23)

Private Share pre-BSC -0.12 0.87 32.16 45.54
(-0.26) (2.29) (2.21) (4.00)

Observations 15 15 15 15
Adjusted R2 0.394 0.375 0.510 0.516

42

C Fed Program Subsidy

The attractiveness of the TSLF is apparent from comparing the loan fees determined
in the auctions to the terms in the private market, as measured in the MMF data. For
example, the schedule 2 auction on 10/1/08 yielded a (uniform) loan fee of 1.51%. As
the TSLF exchanges non-Treasury collateral against Treasuries, the relevant compar-
ison here is the spread between Treasury repo rates and repo rates for non-Treasury
collateral. Figure 10 shows that the spread for private collateral on 9/30/08 was ap-
proximately 7%.10 Thus, the TSLF rate of 1.51% is clearly subsidized relative to
market conditions at the time. For Agency collateral, the comparison between the
schedule 2 auction and the private market rates is less clear-cut. The spread of Agency
repo rates to Treasury repo rates in Figure 10 is often below 1.51%. However, there is
a more clear-cut distinction when comparing the schedule 1 auction, which accepted
Agency but not private collateral, to the private repo market. The schedule 1 auction
on 10/1/08 yielded a (uniform) loan fee of 0.42%, which is lower than most of the
Agency repo spreads in Figure 10. Finally, note that the fact that dealer banks with
high shares of Agency collateral in 2008Q1 also turned to TSLF funding indicates that
borrowing from the TSLF was not perceived to carry stigma.
Some dealers with a high pre-BSC private collateral share maxed out their funding
under TSLF. Where did they fund there excess private collateral? As we know from
Figure 8, they did not obtain further repo funding from MMF with this type of col-
lateral. Column (4) of Table 10 provides the answer: They turned to the PDCF. The
amount borrowed from the PDCF is strongly positively correlated with the pre-BSC
private collateral share. Unlike the TSLF, dealer banks with high Agency collateral
10
Private collateral on this date included a substantial amount of corporate equities, which was not
eligible as TSLF collateral. However, the average repo rates for corporate debt and corporate equities
were virtually identical on this date.

43

shares however avoided the PDCF even though funding rates were attractive for pri-
vate collateral (2.25% on 9/30/08), and all collateral eligible for tri-party repo funding
was also eligible for borrowing under the PDCF. This is consistent with the view that
borrowing from the PDCF was viewed as carrying a stigma similar to the stigma associ-
ated with discount-window borrowing from the Fed (on which the PDCF was modeled).
Borrowing from the PDCF seems to be viewed as a last resort that dealer banks try to
avoid at possibly high cost. For example, Lehman Brothers did not access the PDCF
prior to its bankruptcy filing (Valukas (2010)).

D Summary

Overall, these findings reiterate that the problem of repo was one of funding private
collateral. Any heterogeneity in funding conditions among dealer banks was driven
by the type of collateral held by the banks. The dealers with high private collateral
shares found themselves in difficulty not because of a run on a counterparty per se, but
because getting repo financing with private collateral became expensive. To avoid high
financing costs in the repo market, dealer banks with high private collateral shares
turned to the TSLF and PDCF. Dealer banks with low private collateral shares, in
contrast, avoided the PDCF, despite the attractively low rates charged in the PDCF
relative to market rates at the time.

VII Conclusion

We examine data on the repo lending by money market funds and security lenders
to understand the role of repo in the demise of the shadow banking system, and as
a factor in the financial crisis. Money market funds and securities lenders provide

44

the majority of repo funding to the shadow banking system. During the financial
crisis, repo funding with (non-Agency) securitized assets collateral contracted sharply.
The data is consistent with the “run on repo” that has been prominently emphasized
by Gorton and Metrick (2010, 2011b, 2011a). However, repo accounts for only a
small fraction of the short-term funding of securitized assets in the shadow banking
system prior to the crisis. This finding does not support the emphasis that Gorton and
Metrick (2010, 2011b, 2011a) Adrian and Shin (2010) have placed on the repo market in
explaining the collapse of the shadow banking system. Instead, the short-term funding
of securitized assets through ABCP and direct investments by money market investors
are an order of magnitude larger then repo funding, and the contraction in ABCP is
an order of magnitude larger than the run on repo. Troubles in funding securitized
assets with repo may have been a major factor in the problems of some dealer banks
that were most heavily exposed to these assets, but for the shadow banking system as
a whole, the role of the repo market appears small.
Overall, our findings are consistent with views of the crisis which emphasize a
significant run on short-term debt financing, but raises questions about the specific
instruments and channels underlying this run. More research is needed to understand
these important details.

45

References

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Commercial Paper Funding Facility, FRBNY Economic Policy Review , forth-
coming.

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Financial Intermediation 19, 418–437.

Brunnermeier, Markus K., 2009, Deciphering the Liquidity and Credit Crunch 2007-
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Caballero, Ricardo, and Arvind Krishnamurthy, 2009, Global Imbalances and Fi-
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Market before the 2010 Reforms, working paper , Federal Reserve Bank of New
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48

Appendix

A Money Market Mutual Fund SEC Filings Data

Table A.I lists the fund families for which we have collected repo data as of the time of
this writing, along with the CIK numbers under which their portfolio holdings reports
are filed with the SEC. Often the reports of many or all money market funds of a family
are filed under the same CIK number. In other cases (e.g., Dreyfus), the reports are
filed under different CIK numbers.
The most difficult part of the data collection is the classification of collateral. Typ-
ically, the holdings reports provide a brief description of the collateral underlying the
repo agreement, such as ”U.S. Treasury Securities”, or a list of specific securities (in
terms of maturity, coupon rate, and issuer). In some cases, the portfolio of securities
underlying a repo agreement can be a mix of different types of securities. The most
common case of mixed collateral involves Treasury securities mixed with Agency bonds
or Agency-backed MBS. Non-Agency backed MBS/ABS or corporate bonds are only
very rarely mixed with Treasuries and Agency securities. Except in rare cases, the
filings do not report the portfolio weights. To approximate the portfolio weights, we
count the number of securities in the list of securities in the portfolio, and we assign
portfolio weights based on the relative number of times a collateral type is mentioned
in this list. For quantity calculations, we split the notional value of a repo agreement
with a portfolio of collateral based on these portfolio weights. For calculations involv-
ing repo terms by collateral, we assign the collateral type that has the highest number
of counts in the list of securities.
Some fund families (e.g. Goldman Sachs and Fidelity) have the funds in their family

49

Table A.I: Sample of Money Market Fund Families

Fund family CIK numbers

Blackrock 97098
Dreyfus 1171061, 819940, 717341, 871967,
312564, 885409, 831363, 878092, 863471,
814236, 865440, 779128, 885408, 30158,
30160, 846421, 759667, 820482, 740766
Federated 856517, 852495
Fidelity 278001, 35315, 276516, 356173,
704207, 917286
Goldman Sachs 822977
JP Morgan 1217286, 763852
Morgan Stanley 1227155
Reserve 83335
Schwab 857156
Vanguard 106830

pool much of their repo investments in a joint account. For these joint accounts, the
ﬁlings report a list of counterparties to the repos in this joint account, but only one
repo rate for the whole account, and only the total collateral amount for the whole
joint account, while notional values are listed by counterparty. We assign the single
repo rate and the same haircuts to all counterparties to the repos in this joint account.

B Risk Management Association Securities Lender

Data

Some securities lenders do not participate in the RMA survey in some quarters (see
table A.II. Participants are marked with “x”). The biggest worry in this regard is
about the non-participation of State Street in some of the surveys. State Street’s cash

50

collateral reinvestments amount to more than $0.5 trillion, and so omission of State
Street would substantially understate the role of securities lenders. For this reason, we
impute State Streets’ cash collateral reinvestment position (marked with “e” in Table
A.II). We collect the total cash collateral reinvestment amount from State Street’s
10-K and 10-Q ﬁlings, and we assume that State Streets cash collateral is invested
in the same way as the aggregate cash collateral portfolio of the securities lenders
that participate in the RMA survey in a given quarter. A comparison of the portfolio
allocations in adjacent quarters in which State Street does and does not participate
does not reveal any substantial shifts in allocations. This indicates that State Streets
portfolio allocation is unlikely to be very diﬀerent from the allocation of other securities
lenders.

51

Table A.II: RMA Survey Participants

2006 2007 2008 2009 2010
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
AIG Global Investment Corp x x x x x x x
Mellon Fin. Corp./Bank of New York Mellon x x x x x x x x x x x x x x
Barclays Global Investors x x x x x x x x x x x
Boston Global Adv./Goldman Sachs Agcy. Lend. x x x x x x x x x x x x x x
Brown Brothers Harriman & Co. x x x x x x x x x x x x
Citibank, N.A. x x x x x x x x x x x x x x
Comerica Bank x x x x x x x x x x x x
Credit Suisse x x x x x x x
Dresdner Kleinwort x x
Frost National Bank x x x x x x x x x x x x x x
Investors Bank & Trust Company1 x x

52
JPMorgan Chase & Co. x x x x x x x x x x x x x x
M & I Global Securities Lending x x x x x x x x x x x x x x
MetLife Insurance Company x
The Northern Trust Company x x x x x x x x x x x x x x
PFPC Trust Co./PNC Global Inv. Serv. x x x x x x x x x x
State Street2 e e e e e e x e x x x x x x
U. S. Bank, N.A. x x x x x x x x x x x x
Union Bank of California, N.A. x x x x x x x x x x x x x x
The Vanguard Group, Inc. x x x x x x x x x x x x x x
Wachovia Global Securities Lending x x x x x x x x x x x x x x
Wells Fargo Institutional Investments x x x x x x x x x x x x

1
Acquired by State Street.
2
Entries labeled “e” indicate quarters in which State Street did not participate in the RMA survey, and in which we obtain the total
amount of cash collateral from State Street’s 10-K/10-Q ﬁlings, and we estimate State Street’s allocation of this cash collateral to diﬀerent
assets under the assumption that the allocation is the same as the allocation reported in the RMA for survey participants.

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