Question

Which of the following is a true statement about the panic in the shadow banking system?

Derivative transactions did not require additional collateral calls

As spreads increased and runs started on the unsecured debt, pressure began to accumulate in the last market institutions could borrow - the secured funding market for repo

Fire sales did not contribute to uncertainty about values on balance sheets

There may have been liquidity problems with the troubled financial institutions like AIG but solvency problems overwhelmed any question about liquidity

Answer 1

The answer is "As spreads increased and runs started on the unsecured debt, pressure began to accumulate in the last market institutions could borrow - the secured funding market for repo"

The spread between unsecured debt vs risk free instrument (Treasury bond) reflect investors risk appetite. Higher spread will result in investors selling risky unsecured debt in favour of risk free (Treasury bond) asset. Here The NBFC will then need to tap repo market for funding requirement as credit market freezed due to panic in financial system.