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regarding the acceptable degree of leverage, or in the margin requirements associated
ated with borrowing against the securities that intermediaries hold. Gorton and
Metrick (2009), Adrian and Shin (2009), and Geanakoplos (2010) have all stressed
the importance of increases in margin requirements in the overnight repurchase
(or “repo”) market as a factor that contracted the supply of credit in 2008 and 2009.
Even when shocks to the supply of intermediation originate in a tightening of
leverage constraints and/or margin constraints owing to an increased assessment
of the risk associated with intermediaries’ assets, the effects of the shocks will be
amplified by the dependence of the supply of intermediation on the capital of the
intermediary sector. Intermediaries that are forced to sell assets as a result of tightened
ened leverage constraints are likely to suffer losses, and more so to the extent that
many of them are forced to sell similar assets at the same time, or to the extent
that they are the only “natural buyers” of the assets in question. These losses will
then further reduce their capital, further reducing the amount that they are able
In this respect the framework sketched here agrees with the one proposed by Bernanke and Blinder
(1988), who refer to th...
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