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Economic Quarterly

Fourth Quarter 2011

Strategic Behavior in the Tri-Party Repo Market

Huberto M. Ennis

The repo market in the United States played a significant role during the 2007–2009 global financial crisis. A large portion of the transactions in this market take the form of a tri-party repo, where a third party (a clearing bank) intermediates between the borrower and the lender. The sudden withdrawal of tri-party repo funding was a critical factor leading to the demise of Bear Stearns. It is now widely believed that the tri-party repo infrastructure has some serious vulnerabilities. Using non-cooperative game theory to analyze the strategic interactions between the main players in this market provides new and important insights regarding the genesis of these vulnerabilities. Changes in perceptions about the ability of the borrower to obtain future funding can unravel in an immediate withdrawal of all lending sources

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