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During the Subprime crisis the entire banking industry risked collapsing under an unprecedented lack of liquidity. This work tries and find what channel allowed a relatively small systemic shock, the increased mortgage delinquency in the US housing market, to spread worldwide with such a terrific impact. The author develops a model of financial contagion where banks adopting the originate-to-distribute model satisfy their liquidity needs through repurchase agreements in the money market. The author assumes there are no early diers in the economy, and the author looks at crises originating from inaccurate forecasting of asset returns by some banks.
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