Essays on repurchase agreements, bailouts, and the macroeconomics effects of bank failures
In this dissertation, I study different aspects of the financial system within times of crisis with special attention paid to money market mutual funds (MMMF) and their use of repurchase agreements ("repos"). Repos play a significant role in global credit market activity. Yet, research regarding the underlying components of repos remains nascent. In the first chapter, I examine the role of risk tolerance on lending and collateral within these agreements. In the second chapter, I study a model in which a risk-pooling intermediary engaging in the repo market, such as a MMMF, is exposed to runs. Inspired by events during the financial crisis, I show that bailouts are part of an efficient social insurance scheme in the event that a run emerges. However, this result does not imply that optimal intervention completely isolates shadow-banking intermediaries from a crisis. In fact, optimal public sector intervention imposes costs on money market funds by requiring them to liquidate some collateral. On the other hand, a commitment to no bailouts contributes to financial instability as the repo market collapses in the wake of a run without a public safety net. Chapter three expands my analysis of financial stress into the realm of traditional depository institutions. This chapter examines the effects of exogenous bank failures in the United States from 1973 - 2006. My results support the previous literature which suggests that real economic activity is lower following a shock. However, in addition to a linear model, I consider the possibility of a threshold value within banking shocks. Upon examination, I find that the effects of exogenous failures become asymmetric around $3 billion. Larger shocks are shown to impact the economy significantly. By comparison, smaller shocks have a completely ambiguous effect.