UCLouvain Economics Seminar: Piero Gottardi

A Theory of Repurchase Agreements, Collateral Re-use, and Repo Intermediation

Piero Gottardi, European University Institute

(Joint paper with Vincent Maurin, European University Institute, and Cyril Monnet, University of Bern, SZ Gerzensee & Swiss National Bank)

This paper characterizes repurchase agreements as equilibrium contracts starting from first principles. We show that repos trade-off the borrower's desire to augment its consumption today with the lender's desire to hedge against future market risk. As a result, safer assets will command a lower haircut and a higher liquidity premium relative to riskier assets. Haircuts may also be negative. When lenders can re-use the asset they receive in a repo, we show that collateral constraints are relaxed and borrowing increases. Re-usable assets should command low haircuts. Finally, endogenous credit intermediation arises whereby trusty counterparties re-use collateral and borrow on behalf of riskier counterparties. These findings are helpful to rationalize chains of trade observed on the repo market.