The evolution of a financial crisis: panic in the asset-backed commercial paper market

By Daniel M. Covitz, Nellie Liang, Gustavo A. Suarez. 2009

114 citations recorded by the source corpus.

The $350 billion contraction in the asset-backed commercial paper (ABCP) market in the last five months of 2007 played a central role in transforming concerns about the credit quality of mortgage-related assets into a global financial crisis. This paper attempts to better understand why the substantial contraction in ABCP occurred by measuring and analyzing runs on ABCP programs over the period from August 2007 through December 2007. While it has been suggested that commercial paper programs, like commercial banks, may be prone to runs, we are the first to conduct a comprehensive empirical analysis of runs in the ABCP market using a rich and novel issue-level data set for all ABCP programs in the U.S. market. A program is defined as being run when it does not issue new paper during a week despite having a substantial share of its outstandings scheduled to mature, and then continuing in a run until it issues. We find evidence of extensive runs: more than 100 programs (one-third of all ABCP programs) were in a run within weeks of the onset of the turmoil and the odds of subsequently leaving the run state were very low. We interpret this finding as an indication that the ABCP market was subject to a bank-like "panic." We also find that while runs were linked to credit and liquidity exposures of individual programs, runs were also related importantly to non-program specific variables in the first several weeks of the turmoil, indicating that runs were relatively indiscriminate during the early part of the panic. Thus the ABCP market may be inherently unstable and a source of systemic risk.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/13e5c4c43f99da52eb5293049ad8c6cdfad39ad5

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Citations in the corpus

Dynamic Debt Runs (2010, background): “Regarding the runs in the asset-backed commercial paper (ABCP) market in 2007, Covitz, Liang, and Suarez (2009) nd that across di¤erent ABCP programs, the reliability of their credit lines is also an important determinant of the likelihood of runs.”
Strategic Complementarity, Fragility, and Regulation (2014, background): “30 See Acharya and Schnabl (2010) and Covitz et al. (2009) for evidence on the runs in the ABCP market. t 0 SIV formed with I RMBS 1 2t Public signal p released t t 1 2 Funds managers receive private signal and decide on CD renewal return on RMBS unit realized In this case the introduction of the…”
How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (2013, methodology): “Stabilizing the ABCP market was considered important to prevent additional strains on the balance sheets of banks that were committed to support the ABCP market (Covitz, Liang, and Suarez (2009)).”
Runs on Money Market Mutual Funds (2016, unknown): “8 Over the years prior to 2008, the provisions of Rule 2a-7 have been tightened to further reduce systemic risks (see Collins and Mack 1994). the context of a simple coordination game with regime change, then discuss several testable implications for investor redemption behavior in funds with…”