Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

More than the grand gestures of deregulation, like the 1999 act, it was this kind of apparently small-scale regulatory change that unfettered the growth of shadow banking. The same was true for repo. Traditionally, repo had been limited by the fact that the categories of assets that were exempt from the automatic stay in case of bankruptcy included only US government and agency securities, bank certificates of deposits and bankers’ acceptances. If those classes of security were offered as collateral in repo, in cases of bankruptcy they could be seized without delay and any losses made good. In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act gave creditors much stronger protection against defaulting borrowers, which ironically increased their willingness to lend. But it also expanded the repo collateral provided with special protection to include mortgage loans and mortgage-related securities. Not surprisingly, in the wake of the act there was a surge in bilateral repo secured on nonstandard assets.