Interbank Repo, Reverse, and Regulations: Roles on the Run

This paper sheds light on the linkages between interbank repo and banking crises. It examines the impacts of repos on the economy, with and without reverse, and the effectiveness of the regulations in preventing the runs. It develops an overlapping generations framework which allows for the economy to adjust to impacts and allows the consequences of such impacts to surface after a period of time. As a result, this paper finds that non-reverse repos coincide with bank runs. Whether reverse is possible depends on the repo size and the repo rate. The repo size is determined by the haircut rate, the value of assets, and the liquidity shortfalls. Moreover, this paper argues that the banks which survive repo runs would be exposed to a higher probability of bank runs even in the absence of a contagious panic. The regulations, capital and liquidity requirements, if causing serious impacts on the banking system, might trigger repo runs and/or bank runs. Thus, banking regulations when being implemented in the economy must be carefully examined and associated with assistance by the authority to prevent such runs.