Second, the potential disruptions to funding stemming from the repo financing of shadow banks should be ended. One of the sources of instability during the crisis was repo runs, particularly on repo borrowers using subprime mortgage-related assets as collateral. Essentially, these borrowers funded long-term assets of relatively low quality with very shortterm liabilities.
These practices would be greatly reduced by rolling back the bankruptcy law for repo collateral to the pre-2005 rules. Prior to then, if a repo borrower defaulted, mortgage-related collateral could not be immediately taken and sold by the creditors. Returning to these rules would discourage the use of mortgage-related assets as repo collateral and reduce the potential for repo runs.