Three essays on economics of rehypothecation

Collateral;Rehypothecation;Moral hazard

Park, Hye Jin

关键词: Collateral;    Rehypothecation;    Moral hazard;   

Others  :  https://www.ideals.illinois.edu/bitstream/handle/2142/98238/PARK-DISSERTATION-2017.pdf?sequence=1&isAllowed=y

美国|英语

来源: The Illinois Digital Environment for Access to Learning and Scholarship

【 摘 要 】

In the first chapter of my thesis, I develop a theoretical model of rehypothecation,a practice in which financial institutions re-use or re-pledge collateral pledged by their clients for their own purposes. I show that rehypothecation has trade-off effects; it enhances provision of funding liquidity to the economy so that additional productive investments can be undertaken, but incurs deadweight cost by misallocating the asset among the agents when it fails.Next, I show that the intermediary's choices of rehypothecation may not achieve a socially optimal outcome. The direction of the conflict between the objectives of the intermediary and social efficiency depends on haircuts of the contract between the intermediary and the borrower; if the contract involves over-collateralization, there tends to be an excessive use of rehypothecation by the intermediary, and if the contract involves under-collateralization, there tends to be an insufficient use of rehypothecation.In the second chapter, I extend the previous model into a dynamic economy with aggregate uncertainty that financial intermediaries might default having repledged their clients' collateral. I discuss how individual reuse decisions, allocation of collateral, and aggregate output vary across (i) different temporary shocks and (ii) different persistent shocks. I show that when negative temporary shocks reduce the borrower's willingness to allow rehypothecation, the economy drops further, but it recovers faster. In addition, I show that a more protracted period of good shocks can lead to a greater fall in output in the future.In the third chapter, I consider the competition between direct financing and rehypothecation. A borrower faces two alternative ways of financing: one option is to borrow funding directly from a cash holder (directfinancing), another option is to borrow funding through an intermediary (indirect financing). With direct financing, the borrower delivers collateral directly to the cash holder with some transaction costs. With indirect financing, the borrower delivers collateral to the intermediary who then lends (rehypothecates) it to the cash holder, and this exposes the borrower with the risk of losing collateral in case that the intermediary defaults. I investigate how the severity of the borrower's moral hazard problem affects the borrower's choice between these two alternative ways of financing. If the intermediary's default risk is exogenous, as the moral hazard problem gets more severe, the borrower is less concerned about the default risk of the intermediary, resulting in indirect financing being chosen more frequently. However, if the intermediary's default risk is endogenous, as the moral hazard problem gets more severe, the cost of indirect financing also increases, resulting in indirect financing not being chosen in both cases that the severity of the moral hazard problem is too small or too large.