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FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks

Following the post-crisis reforms discussed in the dealer bank failure literature, which policy combination most directly reduces the risk that a failing dealer's tri-party repo lenders trigger a fire sale of collateral?

Tougher haircuts, less dependence on the clearing bank's intraday credit, and sturdier funding from cash investors reduce the chance of a run and a collateral fire sale in tri-party repo. Looser haircuts and more intraday credit would do the opposite.

  1. ALower haircuts on repo collateral and extended intraday credit from clearing banks
  2. BHigher haircuts, reduced reliance on intraday credit by the clearing bank, and greater stability of cash investor fundingCorrect
  3. CRemoval of the safe harbor for cash investors only
  4. DBanning all repo against non-government collateral without other changes

Explanation

Reforms focused on making tri-party repo less run-prone: more conservative haircuts, less dependence on clearing bank intraday credit, and better collateral liquidation processes. Lower haircuts and more intraday credit increase fragility. A total ban is not the core reform and is not the correct description.

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