The Run On Repo and the Liquidity Shortage Problems of the Current Global Financial Crisis: Europe vs. The US

Beniamino MORO

Makale detayları

The Run On Repo and the Liquidity Shortage Problems of the Current Global Financial Crisis: Europe vs. The US

Yazarlar:

Beniamino MORO

Yayıncı:

Türkiye Ekonomi Kurumu Vakfı

Ana Başlıklar:

Ekonomi ve Maliye

Dergi:

Ekonomi-tek 2013 Vol.2 Issue 1, pp.41-77

Belge Tipi:

Makale

Yayın Tarihi:

12/2012

Belge Dili:

İngilizce

Document ID (Org No.):

2000404289

eISSN:

2791-7991

pISSN:

2146-6173

Özet:

 

This paper discusses several key issues regarding the current Great Crisis, which has extended over two periods. The first period covered the 2007-09 subprime crisis in the US, while the second took the form of a twin sovereign debt and banking crisis in Europe after 2010, and persists until now. At the core of the problem is the emergence over the last 30 years of a shadow banking system, which re-created the conditions for a panic. This time, the panic firstly took place in the repo market, which suffered a run when “depositors” demanded ever-increasing haircuts. Fears of insolvency reduced interbank lending, and this so-called “run on repo” caused temporary disruptions in the pricing system of short-term debt markets. The subsequent crisis reduced the pool of assets considered acceptable as collateral, resulting in a liquidity shortage. With declining asset values and more frequent haircuts, the US banking system was effectively insolvent for the first time since the Great Depression. Via the banking system, the American “run on repo” soon infected the European financial system, becoming both a twin sovereign debt and banking debacle in many peripheral Euro area countries that raised doubts of the survival of the Euro and the regular functioning of the European Monetary System. The paper concludes that, for a successful European crisis resolution, we need to implement both a fiscal union and a banking union, ensuring that fiscal and banking policies in the  Eurozone are partly centralized so as to meet the requirements necessary for the regular functioning of a monetary union.

 

This paper discusses several key issues regarding the current Great Crisis, which has extended over two periods. The first period covered the 2007-09 subprime crisis in the US, while the second took the form of a twin sovereign debt and banking crisis in Europe after 2010, and persists until now. At the core of the problem is the emergence over the last 30 years of a shadow banking system, which re-created the conditions for a panic. This time, the panic firstly took place in the repo market, which suffered a run when “depositors” demanded ever-increasing haircuts. Fears of insolvency reduced interbank lending, and this so-called “run on repo” caused temporary disruptions in the pricing system of short-term debt markets. The subsequent crisis reduced the pool of assets considered acceptable as collateral, resulting in a liquidity shortage. With declining asset values and more frequent haircuts, the US banking system was effectively insolvent for the first time since the Great Depression. Via the banking system, the American “run on repo” soon infected the European financial system, becoming both a twin sovereign debt and banking debacle in many peripheral Euro area countries that raised doubts of the survival of the Euro and the regular functioning of the European Monetary System. The paper concludes that, for a successful European crisis resolution, we need to implement both a fiscal union and a banking union, ensuring that fiscal and banking policies in the  Eurozone are partly centralized so as to meet the requirements necessary for the regular functioning of a monetary union.

Makale detayları

The Run On Repo and the Liquidity Shortage Problems of the Current Global Financial Crisis: Europe vs. The US

Yazarlar: Beniamino MORO

Yayıncı: Türkiye Ekonomi Kurumu Vakfı

Ana Başlıklar: Ekonomi ve Maliye

Dergi: Ekonomi-tek 2013 Vol.2 Issue 1, pp.41-77

Belge Tipi: Makale

Yayın Tarihi: 12/2012

Belge Dili: İngilizce

Document ID (Org No.): 2000404289

eISSN: 2791-7991

pISSN: 2146-6173

Sayı

Yazarlar:

Beniamino MORO

Yayıncı:

Türkiye Ekonomi Kurumu Vakfı

Ana Başlıklar:

Ekonomi ve Maliye

Dergi:

Ekonomi-tek 2013 Vol.2 Issue 1, pp.41-77

Belge Tipi:

Makale

Yayın Tarihi:

12/2012

Belge Dili:

İngilizce

Document ID (Org No.):

2000404289

eISSN:

2791-7991

pISSN:

2146-6173