(repos - see Box 2.E). In addition, banks may also acquire reserves from other financial market participants using a variety of contracts including certificates of deposits, brokered deposits, repurchase agreements, and commercial paper. In practice, wholesale funders are typically able to withdraw their own funds from a bank before members of the public, and therefore tend to enjoy 'seniority' in terms of repayment as a result of their better access to information and the slower speed of normal depositors (due to deposit insurance). As Huang and Ratnovski (2010) explain in an IMF working paper:
"This was the main reason why in almost all recent bank failures (e.g., Continental Illinois, Northern Rock, IndyMac) short-term wholesale financiers were able to exit ahead of retail depositors without incurring significant losses. Interestingly, the wellpublicized retail run on Northern Rock took place only after the bank had nearly exhausted its liquid assets to pay off the exit of short-term wholesale funds.�
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Box 2.E Repos (Sale and Repurchase Agreements) The standard method by which the Bank of England creates reserves is through what is known as a sale and repurchase agreement (a 'repo'). This is similar in concept to a collateralised loan, in which the borrower must put up some collateral that they will lose if they fail to repay. The process of obtaining reserves using a repo is as follows. Megabank temporarily sells an 'interest3 in an asset (usually a government bond) to the central bank in exchange for central bank reserves, while agreeing to repurchase the same interest in the asset for a specific (higher) price on a specific date in the future. If the repurchase price is io?S higher than the purchase price (i.e.io96 higher than ÂŁ10,000 = ÂŁ11,000) then the 'repo rate3 is said to be 10%. Under international accounting standards (IAS39 as adopted under the new International Financial Reporting Standard IFRS9) a repo transaction has different accounting rules from an outright sale. Unlike in the Open Market Operation example, the Bank of England balance
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