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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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Contagion in the 2008 Crisis: The Run on the Nonbank Sector, “Shadow Banks”

Contagion in the 2008 Crisis: The Run on the Nonbank Sector, “Shadow Banks”

(p.67) 7 Contagion in the 2008 Crisis: The Run on the Nonbank Sector, “Shadow Banks”
Connectedness and Contagion

Hal S. Scott

The MIT Press

This chapter describes how contagion principally manifested itself in the nonbank sector during the 2008 financial crisis. The Lehman bankruptcy and ensuing breaking of the buck by the Reserve Primary Fund (RPF) highlight the centrality of nonbank financial institutions in the contagion context. Contagion effects spread from the money market funds to asset-backed commercial paper (ABCP), interbank lending, and secured repo markets as well as to other areas of the nondepository banking system. Contagion in short-term capital markets also shook confidence in the ability of the surviving investment banks to continue funding themselves. The government's response to the financial crisis include the Federal Reserve's approval of an $85 billion secured revolving credit facility for AIG under Section 13(3) of the Federal Reserve Act; and its launching of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), which lent to banks so they could purchase asset-backed commercial paper from money market funds.

Keywords:   contagion, 2008 financial crisis, nonbank financial institutions, financial policy, investment banks, money market, commercial paper markets, interbank lending, secured repo markets, Federal Reserve

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