A disorderly liquidation of assets that could fuel financial contagion is a significant risk from an important funding market for US banks, according to a paper published yesterday by the Federal Reserve Bank of New York.
Fire sales, where assets are sold in a manner that can sharply depress prices and thereby pressure other investors into selling their assets, was a hallmark of the financial crisis in 2008, when Lehman Brothers collapsed.
This type of confidence crisis among investors remains a major risk for the $2tn US repurchase or repo market, which serves as an important venue for banks funding their daily operations.
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