The Run on Repo and the Policy Interventions to Struggle the Great Crisis

At the core of the recent Great Crisis is the emergence over the last thirty-five years of the shadow banking system, which re-created in the US the conditions for a panic. This time the panic firstly took place in the repo market, which suffered a run when “depositors” required 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 increasing haircuts, the US banking system was effectively insolvent for the first time since the Great Depression. Finally, the policy interventions to struggle the crisis are briefly discussed.