In theory, one could buy a security with one’s own funds and then repo out that security to raise more funds, which could be used to buy another security, which could be repoed out for yet more funds, and so on, ad infinitum.
However, in practice, this infinite multiplier would come up against the credit limits imposed by all banks on their counterparties and regulatory capital constraints (including new measures such as the Basel Leverage Ratio). Even if the borrower tried to borrow from different firms, the inflation of its balance sheet would soon become visible and deter potential lenders. There are also practical constraints such as the impact of haircuts or initial margins, where the purchase price is set below the market value of collateral, reducing its financing potential.
Back to Frequently Asked Questions on Repo contents page
<<< Previous page Next page >>>