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Repo Collateral Fire Sales - The Effects of Exemption from Automatic Stay PDF Ebook

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What are the consequences of a potential fire sale stemming from the exemption of repurchase agreements (repos) from automatic stay? This paper shows that repo's exemption from stay alters firms' financing and investment decisions ex ante. Specifically, a stay exemption changes firms' investment opportunity set, enabling them to purchase assets of defaulted firms at fire sale prices. Fire sales arise endogenously because of limited capital available to purchase collateral posted by insolvent firms, i.e., cash-in-the-market pricing. A fire sale effectively creates a premium for holding on to dry powder and concentrates asset ownership with firms that have preferences to keep highly leveraged positions and risk default. The premium reduces the initial asset price, potentially inducing more firms to take on dangerous positions, increasing the fraction of defaulting firms in the economy. In contrast, when repo is subject to automatic stay secured lenders do not get their collateral immediately, reducing the severity of a fire sale and ex ante price distortions.


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ISBN: 9781499136821 ISBN-10: 149913682X Number Of Pages: 48 Published: 14th April 2014 Publisher: CreateSpace Country of Publication: US Dimensions (cm): 27.94 x 21.59 Weight (kg): 0.14
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