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• W3121484588 abstract "* The 2007-09 financial crisis saw many funding mechanisms experiencing disruptions, with borrowing rates and haircuts reaching record highs and some funding markets freezing entirely. * Yorulmazer presents case studies of several major financial markets and intermediaries that experienced significant distress during the crisis. * The author discusses the size and evolution of each market, the sources of disruption, and the policy responses aimed at mitigating distress and restoring market liquidity. * The review's broad focus includes auctionrate securities, commercial paper, money market mutual funds, and repo markets. * The article serves as a reference on key episodes of financial market stress, and is useful for policymakers contemplating the scope and design of future market stabilization efforts. 1. INTRODUCTION During the crisis of 2007-09, many funding mechanisms experienced disruptions, when borrowing rates and haircuts reached record-high levels and some funding markets completely froze. This paper discusses several funding mechanisms that experienced significant distress during the crisis. For each case, we provide a discussion of the size and the evolution of the mechanism, the sources of the disruptions, and the policy responses aimed at mitigating distress and making markets more liquid. (1) In particular, we consider auction rate securities, commercial paper, asset-backed commercial paper, money market mutual funds, the bilateral and tri-party repo markets, credit commitments by banks, dollar funding of non-U.S. banks, and the fragility associated with wholesale funding, using a discussion of the Northern Rock episode. 2. AUCTION-RATE SECURITIES 2.1 Background An auction-rate security (ARS) is a long-term debt security-whose interest rate is reset regularly via an auction process. On each auction date, current investors decide how many shares they wish to redeem, bidders place bids for these shares, and a stop-out rate is determined. This interest rate is then paid by the issuer on all shares until the next auction date. An auction fails if there are fewer bids than investors seeking to redeem shares. In this case, the interest rate on the securities is reset to a maximum rate to compensate investors for the inability to redeem their shares and to provide the issuer with an incentive to restructure the obligation. Leading into the crisis, ARS were mostly issued by municipalities or their authorities in the form of tax-exempt or taxable bonds (municipal ARS, or MARS), by corporations or by closed-end mutual funds in the form of preferred stocks (ARPS), or by student loan authorities (student loan ARS, or SLARS). Investors were typically corporate treasurers and high-net-worth individuals looking for liquid securities yielding more than money market funds or other cash accounts. In terms of size, the ARS market was substantial: ARS outstanding totaled about $330 billion at the end of 2007, roughly half of which was accounted for by MARS (Han and Li 2010). 2.2 Source of Fragility The ARS was a form of maturity transformation. The underlying asset was a long-term debt security, but holders of the security-in normal times-could withdraw their funds by redeeming shares in the next auction. Importantly, there was little to no market for these securities outside of the regularly scheduled auctions. A holder of the security who expects future auctions to fail may want to sell in the current auction to avoid being locked into the security. Similarly, new investors may be unwilling to bid in the current auction if they expect that future auctions may fail. In this way, a fear of failed auctions may become self-fulfilling. Two features served to limit fragility in this market in the pre-crisis period. One was the penalty rate imposed after a failed auction, which made the security attractive to some investors even in the event that future auctions failed. …" @default.
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• W3121484588 title "Case Studies on Disruptions during the Crisis" @default.
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