3 Most decentralized lending protocols require loans to remain overcollateralized, with loans that fall below specific thresholds subject to automatic liquidations. These liquidations can have a persistent effect on asset prices, which often triggers further liquidations. See preliminary research in Alfred Lehar and Christine A. Parlour (2022), “Systemic Fragility in Decentralized Markets,” unpublished paper, June 13, https://econ.hkbu.edu.hk/eng/Doc/20220616_LEHAR.pdf.
Although the Federal Reserve had no supervisory responsibilities or authorities with respect to Lehman, it began monitoring the financial condition of Lehman and the other primary dealers during the period of financial stress that led to the sale of Bear Stearns to JPMorgan Chase.