Re:Repo Blowup Was Fueled by Big Banks and Hedge Funds, BIS ...
by JumpCrisscross on Monday December 09, 2019 @01:38PM
(#21745099)
> a classical collateral secured transaction is fundamentally different than a repo as described
You shouldn't be downvoted. The observation is correct.
In a collateralized loan, the borrower owns the collateral. In a repo, the borrower does not. This is one reason why companies finance capital equipment with secured loans, not repos.
A repo also involves two collateral purchase-and-sale transactions; a collateralized loan involves zero. This restricts it to highly liquid assets, where everyone agrees on prices and settlement is fast and cheap. In practice, this almost exclusively means Treasuries.
I was handwaving when I said they're the same transaction. They're symmetrical, cash-flow wise. But you can't replace secured loans with repos or vice versa. Repos are secured borrowing with minimal counterparty risk. Secured loans are secured borrowing with broad asset coverage.
> a classical collateral secured transaction is fundamentally different than a repo
Not fundamentally. Just different. (I'd also note that the "classic" collateralized transaction is a spherical cow.)
Lender leasing the collateral to the borrower makes a repo functionally identical to a secured loan. Lenders requiring ring-fenced collateral (e.g. in a cash-backed loan) are repos with extra steps. This symmetry belies their fundamental similarity.
There are legal differences in edge cases. But fundamentally, they're both collateralized borrowing.
You shouldn't be downvoted. The observation is correct.
In a collateralized loan, the borrower owns the collateral. In a repo, the borrower does not. This is one reason why companies finance capital equipment with secured loans, not repos.
A repo also involves two collateral purchase-and-sale transactions; a collateralized loan involves zero. This restricts it to highly liquid assets, where everyone agrees on prices and settlement is fast and cheap. In practice, this almost exclusively means Treasuries.
I was handwaving when I said they're the same transaction. They're symmetrical, cash-flow wise. But you can't replace secured loans with repos or vice versa. Repos are secured borrowing with minimal counterparty risk. Secured loans are secured borrowing with broad asset coverage.
> a classical collateral secured transaction is fundamentally different than a repo
Not fundamentally. Just different. (I'd also note that the "classic" collateralized transaction is a spherical cow.)
Lender leasing the collateral to the borrower makes a repo functionally identical to a secured loan. Lenders requiring ring-fenced collateral (e.g. in a cash-backed loan) are repos with extra steps. This symmetry belies their fundamental similarity.
There are legal differences in edge cases. But fundamentally, they're both collateralized borrowing.