Fire Sales Risk Requires Repo Market Reform, N.Y. Fed Paper Says

The over $2 trillion-a-day repurchase agreement market requires changes to cut risks related to sales of assets triggered by a dealer default or lenders’ perceptions that it may, according to the Federal Reserve Bank of New York.

The potential for so-called “fire sales,” or rapid selling of assets at reduced prices, remains a source of financial instability, New York Fed economists Brian Begalle, Antoine Martin, James McAndrews and Susan McLaughlin wrote in a paper posted today on the bank’s website. Since the 2008 financial crisis that caused a near global credit freeze and disruptions in repo funding, global policy maker have sought to increase bank capital and mitigate side-effects of bank defaults to prevent the need for future government bailouts.