A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market
by Viral V. Acharyaa and T. Sabri Öncüb
One of the several regulatory failures behind the global
financial crisis that started in 2007 has been the regulatory
focus on individual, rather than systemic, risk of financial institutions.
Focusing on systemically important assets and liabilities
(SIALs) rather than individual financial institutions, we
propose a set of resolution mechanisms, which is not only capable
of inducing market discipline and mitigating moral hazard
but also of addressing the associated systemic risk, for instance,
due to the risk of fire sales of collateral assets. Furthermore,
because of our focus on SIALs, our proposed resolution mechanisms
would be easier to implement at the global level compared
with mechanisms that operate at the level of individual
institutional forms. We, then, outline how our approach can be
specialized to the repo market and propose a repo resolution
authority for reforming this market.
JEL Codes: G01, G18, G21, G28.
Full article (PDF, 59 pages 504 kb)
Discussion by Andrew Crockett
a New York University Stern School of Business, NBER, and CEPR
b Centre for Advanced Financial Research and Learning, Reserve Bank of
India and New York University Stern School of Business