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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

During the 2007-2009 crisis, which development best illustrates a run on the shadow banking system rather than a traditional bank run?

Repo lenders refusing to roll over funding and demanding higher haircuts on securitized collateral illustrates a shadow banking run. These institutions relied on uninsured short-term wholesale funding, so withdrawal forced asset sales and deleveraging, unlike a traditional run by insured retail depositors at bank branches.

  1. ARepo lenders refused to roll over short-term funding and demanded higher haircuts on securitized collateralCorrect
  2. BRetail depositors queued to withdraw insured deposits from branches
  3. CCentral banks raised the reserve requirement on checking accounts
  4. DInsurers paid out life policy claims at an unusually high rate

Explanation

Shadow banks such as broker-dealers and conduits relied on short-term wholesale funding like repo and asset-backed commercial paper, which lacked deposit insurance. When lenders stopped rolling funding and raised haircuts, forced asset sales followed. Retail deposit queues describe a traditional run.

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