Collateral Re-use, Liquidity and Financial Stability

In the Aftermath of the 2007-09 financial crisis, repurchase agreement (repo) markets were generally considered to be partly responsible for the crisis. Ten years afterwards, strongly reformed repo markets are far from being dead, as in the US, or even more lively than ever, as in Europe. Over these years, researchers have questioned the capability of repo markets to insulate the financial system from systemic risk. The use of collateral has been a centrepiece of the debate: while used to secure repo transactions, it connects credit and securities' markets, potentially increasing opaqueness and contagion risk. In addition, when the so-called re-use is allowed, the same collateral can back simultaneously multiple transactions, potentially increasing interconnection and leverage. This work analyses the recent literature on repo markets, focusing on the re-use of collateral and its repercussions on financial stability. While there is a relatively rich literature on the overall modelling of the repo markets in general, collateral re-use can benefit from further research. The first set of literature analysed in this work regards the legal framework and the statistical quantification of collateral re-use. A systematic review is then devoted to recent works, both theoretical and empirical, modelling and investigating the relationship between repo market, collateral re-use and financial stability. The identification of less explored areas worth studying more in detail concludes the work.