Monitoring Risks in the Shadow Banking Systemsiteresources.worldbank.org/FINANCIALSECTOR/...11th Annual International Seminar on Policy Challenges for the Financial Sector, 06/01/2011

11th Annual International Seminar on Policy Challenges for the Financial Sector, 06/01/2011

Monitoring Risks in the Shadow Banking SystemTobias Adrian, FRBNY*

*The views expressed in this presentation are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.

2

What are Shadow Banks?

� Shadow banks are financial entities that conduct either all three

or any one of the classic bank functions:

1. Credit transformation: enhancement through priority and guarantees

2. Maturity transformation: long term assets, short term liabilities

3. Liquidity transformation: illiquid assets funded by illiquid liabilities

� But without the liquidity and credit puts provided by the discount

window and deposit insurance.

� Much of the interaction between financial intermediaries and

financial markets is conducted by these “shadow banks.”

3

1. Direct and implicit: Debt issued by GSEs; local government investment pools

2. Indirect and explicit: Off-balance sheet activities of depository institutions (unfunded loan commitments, lines of credit, and trading liabilities) and GSEs where there is contractual obligation to fund

3. Indirect and implicit: Asset management activities of depository institutions where there is no obligation to fund but reputational risks of not funding

4. Unenhanced: Non-bank finance companies, Investment banks, Monolines and private mortgage insurers; re-insurance, REITs, Hedge funds, Limited purpose finance companies, Stand-alone money market funds, Securities lenders

Shadow Banking System and Official Enhancement

4

Shadow Banking and Commercial Banking Liabilities

0

2

4

6

8

10

12

14

16

18

2019

84 -

Q1

1985

-Q

219

86 -

Q3

1987

-Q

419

89 -

Q1

1990

-Q

219

91 -

Q3

1992

-Q

419

94 -

Q1

1995

-Q

219

96 -

Q3

1997

-Q

419

99 -

Q1

2000

-Q

220

01 -

Q3

2002

-Q

420

04 -

Q1

2005

-Q

220

06 -

Q3

2007

-Q

420

09 -

Q1

2010

-Q

2

$ Tr

illio

n

Net Repo

Commercial PaperMMMFs

ABS Issuers

GSE Liabilities

Commercial Bank Liabilities

5

The 7 Steps of Shadow Banking

1. Loan Origination: (ex: FinCos, ILCs, CBs)

2. Loan Warehousing: (ex: Conduits)

3. ABS Issuance: (ex: RMBS, CMBS, ABS)

4. ABS Warehousing: (ex: broker-dealer warehousing)

5. ABS CDO Issuance: (ex: ABSCDO)

6. ABS Intermediation: (ex: SIV, TOB, HF, foreign entities)

7. Wholesale Funding: (ex: 2(a)-7 fund, enhanced cash fund)

6

Exhibit: Shadow Credit Intermediation

Exhibit 3: The Shadow Credit Intermediation Process

Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))

ABCP, repo

"Funding Flows"

CP ABCP Repo ABCP, repo CP, repo

ABCP $1 NAVLoans Loans Loans ABS ABS ABS CDO

Maturity and Liquidity Transformation

Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding

Credit, Maturity and Liquidity Transformation


Credit Transformation (Blending)




Step 6 Step 7

The shadow credit intermediation process consists of distinct steps. These steps for a credit intermediation chain that depending on the type and quality of credit involved may involve as little as 3 steps and as much as 7 or more steps. The shadow banking system conducts these steps in a strict sequential order. Each step is conducted by specific types of financial entities, which are funded by specific types of liabilities (see Table 2).

Step 1 Step 2 Step 3 Step 4 Step 5

"Asset Flows"

7

Shadow Banking Sub-systems

� Government sponsored shadow banking system� Fannie Mae, Freddie Mac, and Federal Home Loan Bank System

� Internal shadow banking system� Off balance sheet activities of US Financial Holding Companies� Off balance sheet activities of European banks

� External shadow banking system� Diversified broker-dealers� Independent specialists� Private credit risk repositories: insurance companies

� The parallel banking system� Motivation for many shadow banking activities is capital, accounting,

or tax arbitrage some of which will disappear due to regulatory reform

8

Shadow Banks and Core FI’s

� Shadow banks are intertwined with core regulated institutions

� Commercial banks provide credit and liquidity lines

� Broker-dealers securitize and warehouse

� Insurance companies provide credit insurance

� Money market funds provide short term funding

� The exposures of core regulated institutions via the shadow banking

system creates systemic inter-linkages

� Indirect supervision of shadow banking in regulated institutions

9

BHCs and Shadow Banking

Exhibit 9: The Credit Intermediation Process of Bank Holding Companies

CP

etc. CNs*

CPMTNs MTNs MTNsEquity Equity Equity


FH

C's

Cre

dit

In

term

edia

tio

n P

roce

ss

"O

rig

inat

e-to

-Dis

trib

ute

"

Hol

ding

Com

pany

Subs

idiar

ies

ABCP

(Shadow Bank "Deposits")

$1 NAV

2(a)-7 MMMFs

ABCP

Repos

Wholesale Funding

Client Funds

$1 NAV

ABCPLoans Loans Loans ABS


HELs ABCP

"Mezz" HEL ABS

Tranches

Hybrid, Repo/TRS Conduits SIVs(Loan Warehousing) (ABS Warehousing) (ABS Intermediation)

MTNs

"IG" ABSAAA

ABCDO

HELs

Deposits

....stock!

ABCP

CP

Step 2 Step 3 Step 4 Step 5 Step 6




ABS


ABS CDO

Under-writing

Commercial Bank Broker-Dealer Broker-Dealer

Flow… ...flow…

CP ABCP Repo ABCP, repo CP, repo ABCP, repo

"Funding Flows"

...flow…

Under-writing

(ABS Structuring/Syndication)(Loan Origination)

"AuM"

(CDO Structuring & Syndication)

Repos Repos

Other Activities

Other Activities

The credit intermediation process of Financial Holding Companies flows through a chain of subsidiaries and off-balance sheet vehicles (shadow banks), and is funded in capital markets. This intermediation chain enhances the efficiency of bank equity for various reasons. If markets freeze and the FHC's subsidiaries have to "onboard" their normally off-balance sheet assets and activities, capital efficiency can quickly become capital deficiency, with systemic consequences. The process described here is an originate-to-distribute model of non-conforming mortgages, where the originating banks and the broker-dealers that slice and dice mortgages into ABS and ABS CDOS do not retain any first loss pieces along the intermediation chain.

Off

-Bala

nce

Shee

t

"S

had

ow

" V

ehicl

es/A

ctiv

ities

Single-Seller Conduit

Step 7Step 1


Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation


...flow…

"Asset Flows"

...flow…

1010

Exhibit 18: Independent Specialists-Based Credit Intermediation Process - FHCs and DBDs Reliance on Independent Specialists

CP

etc. CNs*


CPABCPReposMTNs

Equity Equity Equity etc. CNs* ABS Stan

dalo

ne S

pecia

lists

(Off-

Balan

ce S

heet

to N

oone

)

Inde

pend

ent S

peci

alis

ts' R

ole

in

FHC

s' a

nd D

BD

s'

Cre

dit I

nter

med

iatio

n Pr

oces

s

"IG" ABS

MTNs

CP

MTNs

……stock!

LPFCs(ABS Intermediation)

Securities Lenders

$1 NAV

(Shadow Bank "Deposits")Mortgage Insurers* Monoline Insurers* Diversified Insurance Cos.*

*AAA, guaranteed!*AAA, guaranteed! *AAA, guaranteed!

Tail Risks

Tail Risks

Tail Risks

Un-Funded

Funded Funded

Un-Funded

Funded

Un-Funded

(Credit Transformation) (Credit Transformation) (Credit Transformation)

(1) T

ail R

isk

Abs

orpt

ion

(2) T

ail R

isk

Abs

orpt

ion

Hol

ding

Com

pany

Subs

idiar

ies

Commercial Bank Broker-Dealer Broker-Dealer(Loan Origination) (ABS Structuring/Syndication) (CDO Structuring & Syndication)

HELsClient FundsOther

ActivitiesOther

Activities

Flow… ...flow… ...flow…

Deposits Under-writing Repos

Under-writing Repos

"AuM"

$1 NAVABCP

AAA ABCDO

MTNsRepos

The "internal" and "external" shadow banking sub-systems are symbiotic. Not only is the independent specialists-based credit intermediation process dependent on FHCs and DBDs as warehouse providers and gatekeepers to capital markets, but FHCs and DBDs also relied on members of the "external" shadow banking system for funding and other functions. As such, independent specialists like LPFCs and securities lenders, for example, are instrumental in funding commercial banks and broker-dealers by buying their term debt. Furthermore, entities called private risk repositories were turning loan pools into AAA-rated, informationally insensitive securities, which in turn served as collateral in secured funding transactions. An example of such a transaction would be a repo collateralized by monoline-wrapped AAA-rated subprime RMBS, where a broker-dealer pledges the RMBS collateral for an overnight cash loan from a 2(a)-7 MMMF. Credit risk repositories were present in both originate-to-distribute and originate-to-fund securitization chains, and each type of risk repository corresponded to specific stages of the shadow credit intermediation process. As such, mortgage insurers wrapped unsecuritized mortgage pools, monoline insurers wrapped ABS (on either the loan pool or the tranche side of deals) while entities like AIG-Financial Products (as well as credit hedge funds, and German Landesbanks' SIVs and conduits (famously IKB's Rhineland by investing in the infamous ABACUS 2007-AC1 deal)) were selling CDS on ABS CDOs. Credit risk repositories made the originate-to-distribute process seem riskless and essentially played the role of private-sector versions of the FDIC in the system.

Off-

Balan

ce S

heet

"S

hado

w"

Vehi

cles/

Activ

ities

FHC

's C

redi

t Int

erm

edia

tion

Proc

ess

"Orig

inat

e-to

-Dis

trib

ute"

Single-Seller Conduit Hybrid, Repo/TRS Conduits SIVs 2(a)-7 MMMFs(Loan Warehousing) (ABS Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")

HELs

...flow… ...flow… ...stock!

ABCP

(3) T

ail R

isk

Abs

orpt

ion(1) D

istribution

(2) Distribution

(3) Distribution

ABCP

"IG" ABS

CP"Mezz" HEL ABS

Tranches

"Asset Flows"

"Funding Flows"

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7








ABCP $1 NAV

Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding


Loans Loans Loans ABS ABS ABS CDO ABCP

Tail Risk Insurance

11

� Macroprudential supervision includes the interaction of supervised institutions with shadow banking activities

� Much of the external shadow banking system can be supervised indirectly via banks or dealers � Hedge fund leverage, off balance sheet maturity transformation

� SIFI designation of non-banks potentially captures additional shadow banking activities

� Major broker-dealers have all been absorbed or have become BHCs

� Reporting requirements and data collection has been expanded

Shadow Banking Supervision

12

Regulatory Reform

� ABCP: accounting and capital regulation reduces appeal of conduits

� SIVs: independent and bank sponsored pretty much stopped

� Repo: triparty repo reform aims at better intraday liquidity provision

� Securitization: risk retention, capital charges

� GSEs: various proposals, likely more capital, less risk taking

� MMMFs: focus on lower risk and stronger liquidity

� Credit Hedge Funds: reporting requirements

� CDS: move to central clearing, higher margins, backstop of CCPs

1313

`

Designed by Zoltan Pozsar ([email protected])

Short-Term Funding Short- to Long-Term Cash Investments

Deposits Money Market "Portfolios"

MMDAs Households, Businesses, Governments,Households, Businesses, Governments CDs and the Rest of the World (RoW)

Equity Funding Long-Term InvestmentsBondsEquity Equity Bank Equity Equity Portfolios

Agency MBS Purchases Agency Debt Purchases

Equity

`

GSEs, DoE, SBA

Equity

Short-Term Debt InstrumentsRegulated Money Market Unregulated Money Market

Agency MBS Agency Discount Notes Intermediaries Intermediaries Corporate Treasurers

ABCPBDP

*Conforming mortgages RRsEnhanced Cash Funds Other*

FFELP ABS Liquidity Puts A1 *ARS, MMMFsA1 CP

AAA ABCPAA-BBB BDPEquity RRs

*Conforming student loans 2a-7 MMMFs Other* Bank TreasurersO/C A1 *ARS, MMMFs, as well as A1

SBA ABS A1 (AAA) ABS Tranches CP MTNs and term ABS CPA1 ABCP ABCP

AAA BDP BDPAA-BBB RRs RRs Short-Term (Cash) InvestmentsEquity Other* Bank Sweep Accounts Other*

*Conforming SBA loans O/C *TOBs and VRDOs A1 *ARS, MMMFs Money Market PortfoliosCP

ABCPBDP

RMBS RRs(1st lien, private label) CP Other* LGIPs

CP Single-Seller Conduit A1 Offshore (non-2a-7) MMMFs *ARS, MMMFs, as well as A1ABCP AAA A1 MTNs and term ABS CPBDP AA-BBB CP ABCP

Equity Equity ABCP BDPBDP RRs

Households Equity O/C Broker-Dealer Subprime ABS Broker-Dealer RRs Other* Households and Nonprofits(2nd lien, subprime, HELOCs) (Trading Book) Trading Book ABCP Other* A1 *MMMFs

A1 *TOBs and VRDOs CPAAA ABCP

AA-BBB BDP2nd Lien Equity RRs

Equity Other* Institututional InvestorsBroker Sweep Agreements CMBS and High-Yield CLOs *ARS, MMMFs, as well as A1

(LBO Loans) BDPs MTNs and term ABS CPA1 ABCP

AAA BDPAA-BBB RRs

Equity Multi-Seller Conduit* Equity Other* Nonfinancial Corporates(Term Conduits) *ARS, MMMFs

RMBS, CMBS Broker-DealerO/C and Subprime ABS (Trading Book)

Deposits Single-Seller Conduit *BHC affiliated A1 AAA DWCP AAA AA-BBB TAF

ABCP AA-BBB LTD MTNs FX SwapsRepo Equity Supers CNs* Tri-Party Repo System TSLFLTD Federal, State TSLF

Nonfinancial Businesses Equity O/C Broker-Dealer* High-Yield CLOs Tri-Party Clearing Banks* and Local Governments PDCF(LBO Loans) Repo Conduit CPFF

A1 TALFAAA AMLF

AA-BBB MMIFFEquity ML, LLC

Equity *Backed by AA-BBB collateral O/C ML II, LLC

CP Single-Seller Conduit *BHC affiliate Consumer ABS *BoNY and JP Morgan Chase ML III, LLC

ABCP (Credit Card ABS) Hybrid Conduit LSAPsBDP A1

AAAAA-BBB RoW

Equity O/C Multi-Seller Conduit* Equity (Foreign Central Banks) Equity(Warehouse Conduits) O/C

Consumer ABSO/C (Card, Auto, Student Loan)

CP Single-Seller Conduit *BHC affiliated A1 MTNs Cash Reinvestment AccountsAAA A1 Securities Lending*

AA-BBB CPEquity ABCP

BDP RoWGovernments Equity O/C Multi-Seller Conduit* Broker-Dealer Other ABS RRs (Sovereign Wealth Funds)

("Rent-a-Conduit") (Floorplan, Equipment, Fleets) Other* *Done by custodian banksA1 AAA A2 and A3 (AAA) ABS Tranches *MMMFs, MTNs, term ABS and on an agent basis.

Single-Seller Conduit AAA AA-BBB TOBs, VRDOs and ARSsAA-BBB MTNsEquity CNs*

O/CCP *Independent, non-BHC *Standalone, non-diversified Middle-Market CLOs Cash Reinvestment Accounts *Issued to central banks

ABCP O/C affiliated (Loans to SMEs) A1 Securities Lending* in exchange for investibe FXBDP A1 CP Long-Term Investments

MTN ` Industrial Loan Company* AAA ABCPLTD AA-BBB BDP Fixed Income Portfolios*

Equity Equity RRs MTNsOther* *Done by real money accounts

*MMMFs, MTNs, term ABS and on a principal basis.*Finance company affiliate TOBs, VRDOs and ARSs CNs

*Bank, Shadow Bank and Corporate Debt

an Banks Asset Managers*Cash

MTNsLTD Equity Portfolios*

Equity

Equity*Mutual Funds, ETFs, Separate Accounts

*Bank and Corporate DebtA4 and AA-BBB ABS Tranches

AAAAA-BBB

Equity LTD MTNs an Banks Pension Funds, Insurance Companies*Supers CNs* Cash

MTNsLTD Structured Credit Portfolios*

CDOs Equity

Equity

*Term ABS and CDOO/C debt and equity tranches

Equity Instruments

Public Equity

Alternative Asset Managers*Cash

MTNsLTD

Structured Credit Equity Equity

Equity*Hedge Funds and Private Equity

(only credit exposures)

Maiden Lane LLC AMLF MMIFF Maiden Lane II LLC

3/11/08 and 3/16/08, respectively

Portfolio Protection*

EquityHouseholds, Businesses, Governments

Households, Businesses, Governments Equity and the Rest of the World (RoW)

BondsEquity

AA-BBBEquity Equity

*including AIG-FP

Source: Shadow Banking (Adrian, Ashcraft, Pozsar (2010))

Step (3): ABS Issuance

Shadow Banks' Funding Sources

Wholesale Funding: Shadow Bank "Depositors"

Ter

m D

ebt a

nd E

quity

Fun

ding

The

"E

urop

ean"

Sha

dow

Ban

king

Sys

tem

(Orig

inate-

to-"E

xpor

t" M

odel)

Agency Debt*

LoansAgency

Debt

CPABS

Long-Term Debt Instruments

*Medium-term debt

HG ABS

LBs

Publ

ic R

isk

Rep

osito

ries

(Sha

dow

Bank

Dep

osit

Insu

rance

)

Shadow Bank Liabilities

Reserves

The

"E

xter

nal"

Sha

dow

Ban

king

Sys

tem

(Orig

inate-

to-F

und M

odel)

Off-

Balan

ce Sh

eet

ABS Collateral

*Broker-dealer affiliate

Loans

ABS

Off-

Balan

ce Sh

eet

ABS

ABCP

Corporate CDS[…

]

Loans

Counterparty Hedges

Debt Insurance

indices, etc.

Cred

it He

dges

*Hedging Motives

Term SavingsHedges

Credit Protection Buyers

Loans

Funded Protection

Reserves Reserves

11/10/2008

OMO Collatera

l

Reserves

unfunded liabilities, etc.

Synthetic Exposures*

[…]

Unfunded Synthetic CDOs*

AAA

Synthetic Credit Liabilities

Medium-Term Debt Instruments

Who

lesa

le F

undi

ng

(O

vern

ight F

undin

g)

The "Synthetic" Shadow Banking System

The Traditional Banking System

The "Cash" Shadow Banking System

AssetsLoans

Unfunded Protection

Ultimate Borrowers

Single-Name and Index

Single-Name and Index

Sovereign CDS

Funded Protection

TALF

Protection Sold

*Speculative Motives

Term Savings

Credit Bets

Equity

Funded Protection

TLGP

CDPCs

Referencing ABS and single-name CDS

*Referencing corporate loan indices, etc.

[…]

Who

lesa

le F

undi

ng

(M

edium

-Term

Fun

ding)

ABS

AAA AAA

Treasurys

Loans, ABS and

CDOsAA-BBB

Ultimate CreditorsCPDOs*

Counterparty Risks*

Short-Term Synthetic Liabilities

AAA

*Market Makers

Long-Term Synthetic Liabilities

Synt

hetic

Cre

dit I

nter

med

iatio

n

The

"Sy

nthe

tic"

Shad

ow B

anki

ng S

yste

m

(D

eriva

tives

-Bas

ed R

isk R

epos

itorie

s)

*Inability to meet*Referencing single-name CDS indices, etc.

Funded Synthetic

Cred

it "R

eferen

ces"

Tax Revenues

Loan(s)

Warehouse Hedges

CDS

CDSProtection

BoughtProtection

Sold

Loan CDS Indices

CDS

Bond(s)

Bond(s)

Homeowners

Subprime Homeowners

Consumers

Businesses

Businesses

Private Equity

Invest- ments

C&I Loans

CRECRE Loans

"Naked" Positions

(Credit-Linked Notes)

Hedgers*

Speculators*

Warehouse Hedges

Loans, ABS and

CDOs

Unfunded Protection

Loans, ABS and

CDOs

Insured Assets

Private Risk Repositories

Mortgage Insurers*

10/7/2008

CPFF

MTNs

Shad

ow C

redi

t Tra

nsfo

rmat

ion

*Unaffiliated with originators!

10/11/2008

Equity

TAF

Priv

ate

Ris

k R

epos

itori

es

(Ena

blers

of th

e Priv

ate

Orig

inate-

to-D

istrib

ute P

roce

ss)

Monoline Insurers*

Premiums

11/25/2008

Maiden Lane III LLC

Credit Insurance

ABCP

Brokered Deposits

Regional and European Banks

Loans

Loans

Loans

ABCP

Loans*

Implicit Insurance

Liability Insurance (Federal Government)

On-Balance Sheet Maturity Transformation

Loans

Credit Insurance (Mortgage Insurers)

Loans*

Off-

Balan

ce Sh

eet

Off-

Balan

ce Sh

eet

Off-

Balan

ce Sh

eet

Loans

Ultimate CreditorsUltimate Borrowers

Ultimate CreditorsUltimate Borrowers

Federal Government

No Explicit

Fees

Implicit Insurance

Federal Government

No Explicit

Fees

Agency Debt

Equity

Repos

Discount Notes

Private ABS

Agency MBS

AA-BBB

Loans*

Mezzanine CDOsAA-BBB

Private ABS

Agency MBS

CMO Tranches

Quasi-Sovereign States

Shadow Maturity Transformation

CMOs(Time-Tranched Agency MBS)

Fannie and Freddie(Retained Security Portfolios)

Liability Insurance (EU Government)

Credit Insurance (AIG FP)

Credit Insurance (GSEs, DoE, SBA)

Liability Insurance (Federal Government)

Implicit Insurance

Agency MBS

Off-Balance Sheet Maturity Transformation

FH

No Explicit

Fees

Supers

Discount Notes

Credit Insurance (Par Puts)

Off-

Balan

ce Sh

eet

FX Swaps

AIGFP*

Off-

Balan

ce Sh

eet

ABCP

CDO

Ultra-Short Bond Funds

ABS

Borrowers

ReservesAgency

Debt

11/25/2008

Agency Debt

11/25/2008

Reserves

Agency Debt Purchases

Loans

Loans

Credit Insurance (Monolines)

*BHC affiliate

Premiums

TSLF/PDCF


AA-BBB

Short-Term Munis

ABS

A1

Agency Debt

Mezz ABSMezz CDO

Agency Debt

Discount Notes A1

$1 NAV Shares

ARSs TOBs

or VRDOs

CP

Reserves Reserves FXAAA Warehoused ABS

Reserves

PremiumsCredit

Insurance

Equity

ABCP


CPReserves

*Public and Private Pension Funds,

$1 NAV Shares

Tri-Party Collatera

lABCP

Structured Credit

CDO

Reserves Reserves

Subprime ABS

RMBS

9/19/2008 10/21/2008

Cash lending for

securities collateral

Principal Securities Lending

Securities Lent

Securities Lent

Non-repo MM instrume

nts

Client Funds

Client Funds

ABS

BDPs

$1 NAV Shares

Private MTNs

AAA (A4)

Ter

m D

ebt a

nd E

quity

Fun

ding

$1 NAV Shares

Mezz ABS

Loans

Long-Term DebtPrivate LTD

Agency LTD

and Life and P&C Insurance Companies

Pension Liabilities

Structured Credit

Super Senior

Cash Collateral

Cash Collateral

Cash Collateral

Cash Collateral

Structured Credit

Who

lesa

le F

undi

ng

$1 NAV Shares

$1 NAV Shares

Who

lesa

le F

undi

ng

(Sho

rt-Te

rm F

undin

g)

$1 NAV Shares

*Regional banks, thrifts, etc.

Commercial Banks*

LoansDollar

Deposits

ABCP

Loans ABCP

Loans ABCP

Loans

Bank Holding Companies

Publ

ic C

redi

t Tra

nsfo

rmat

ion

Publ

ic R

isk

Rep

osito

ries

(E

nable

rs of

the P

ublic

O

rigina

te-to

-Dist

ribut

e Pro

cess)

MTNs

AA-A

Agency Pass-

Throughs

TBA Market

Step (1): Loan Origination Step (6): ABS "Intermediation"

The

"In

tern

al"

Shad

ow B

anki

ng S

yste

m

(P

rivate

Orig

inate-

to-D

istrib

ute M

odel)

Savings: Export

Revenue

FX Reserves

Home1st Lien

Loans ABCP

Goods &

ServicesLoans

Securities

AA-A

"Equity"

"Equity"

"Equity"

Bonds*

Reverse Repos

AA-BBB

AAABBB

AA-BBB

Repos

Home

Local Currency

"Equity"

Brokered Deposits

Brokerage Clients' Cash

Balances

Equity

Savings: Excess Cash



Savings: FX

Reserves

AssetsLoans

Assets

Supers

Agent Securities Lending

Tax Revenues Bonds

Loans

Equity

BBB

1st Lien

Loans

Loans

Deposits

Bonds

Loans

Diversified Broker-Dealers

Government Sponsored Entities

Loans

Commercial Bank

The

Gov

ernm

ent-S

pons

ored

Sha

dow

Ban

king

Sys

tem

(Pub

lic O

rigina

te-to

-Dist

ribut

e Mod

el)

Super Seniors

Loans

Repos

The

GSE

s' C

redi

t Int

erm

edia

tion

Proc

ess

Loans

Munis

ABS

Credit Hedge Fund*

(Retained Security Portfolios)

$1 NAV Shares

Loans

STIFs and

Agency Bills

CPAAA

Federal Government

Off-

Balan

ce Sh

eet

Off-

Balan

ce Sh

eet

Loans

Portfolio Companies

Loans

Federal Government

ABCP

MTNs

LBO Loans

Firms

USTs

*BHC affiliate

MTNs

State Governments

Tax Revenues

State Bonds

Muni Bonds

Local Governments

Tax Revenues

Finance Company*



Loans ABCP

LoansBrokered Deposits

Loans

Standalone Finance Company

Finance Company*

AA-BBB

Non-Bank Specialists

Captive Finance Company

Loans

Loans ABCP

ABCPStructuring

and Syndication

Equity

Loans

Reverse Repos*

AA-BBB

Equity

High-Grade CDOs

AA-BBB

AAA

ABCP

SupersMezzanine CDOs

Term Savings

LTDs

Step (2): Loan Warehousing

Money Fund Guarantee

[…]

Credit Hedge Fund*

*Levered, standalone

LPFCs

Liquidity Puts*

Loans

AAA

Eur

opea

n B

anks

' Fun

ding

Rol

e in

the

Shad

ow B

anki

ng S

yste

m

(Prime-Brokerage*)

*Capital Notes

AA-BBB


Super Seniors

Repos

Asset Manager*

ABCP

Repos

Euro Deposits

[…]

Europe

Debt Tranches

Div

ersi

fied

Bro

ker-

Dea

lers

' Cre

dit I

nter

med

iatio

n Pr

oces

sB

ank

Hol

ding

Com

pani

es' C

redi

t Int

erm

edia

tion

Proc

ess

Inde

pend

ent N

on-B

ank

Spec

ialis

ts' C

redi

t Int

erm

edia

tion

Proc

ess

$1 NAV Shares

Loans

Term SavingsEquity

Tranches

Long-Term Munis

Short-Term Munis

*Capital Notes

Public Equity

Securities Arbitrage Conduit

AA-BBB

ABS

LTD

Term Savings

Super Senior

Traditional Banks' Funding Sources

Temporary MMMF Guarantee*

9/18/2008*Funded by UST's $50 billion

Checking Accounts

CDs

Traditional Bank Liabilities

Loans

Industrial Loan Company*

CP

REITs

[…]

Dep

osit

Fund

ing

Loans

Loans

AA-BBB

CP

AAA

Shadow Credit Transformation

11/25/2008

Agency MBS

Discount Window

High-Grade CDOsSupersAAA

Loans

Term Savings

Bank EquityLoans

Bank Equity

Equ

ity F

undi

ng

Short-Term

Savings

Real Money Accounts*

Short-Term

Savings

Direct Investmen$1 NAV Shares

Broker-Dealer

Tra

ditio

nal B

anks

' Len

ding

Pro

cess

The

Tra

ditio

nal B

anki

ng S

yste

m

("O

rigina

te-to

-Hold

-to-M

aturit

y-in-

Loan

-For

m-via

-Dep

osit-

Fund

ing")

Equity

No Explicit

Fees

Federal Reserve

Depositors

Deposits

Bank Equity

Client Funds

Publ

ic C

redi

t Tra

nsfo

rmat

ion

*Asset Managers, Insurance Companies and

Checking Account

MMMF Insurance

Pension Funds

Assets Loans

Commercial Banks

LoansLoans

Private Risk Repositories

Deposit Insurance (FDIC)

No Explicit

Fees

Implicit Insurance

Loan Collateral

Reserves

Deposit Insurance (FDIC)

FDIC

Insurance Premiums

Deposit Insurance

The Federal Reserve Bank of New York, March, 2010

Assets

Cash Flows

Credit Intermediation, Credit Transformation and Maturity Transformation

[…]

Liquidity Puts*

Step (4): ABS Warehousing Step (5): ABCDO Issuance

Shadow Credit Intermediation

Credit Hedge Funds*

Broker-Dealers*

Credit Protection Sellers

Counterparty Hedges Warehouse Hedges

Protection Sold

Funded Protection

Unfunded Protection

Warehouse Hedges Counterparty Hedges Warehouse Hedges Warehouse and Counterparty Hedges

$

Counterparty Hedges

3/24/2008

CDS on

CDOsReserves ABS

Europe

Credit Insurance (AIG FP)

SIV

*Capital Notes

*ARSs, TOBs, VRDOs

FHLBs

Long-Term Munis

AAA

*ARSs, TOBs, VRDOs

SIV, SIV-Lite

negative basis traders, real money accounts, etc.

Proprietary trading desks, credit hedge funds, etc.

12/12/200712/12/2007

European Sovereign andPBGC

Securities Arbitrage Conduit

Exchange Stabilization Fund

Loans

Direct Money Market Investors

The Shadow Banking System - Preliminary Draft for Comments; Do Not Forward Without Permission of Authors

Equity

Broker-dealer CVA desks, ABS pipeline hedges,

AAA (A2-A3)

AA-BBB

Euro Deposits

AAA

The Shadow Banking Map

14

ABCP

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

Bill

ion

ABCP Financial CP Nonfinancial CP

15

Repo Market

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

Trill

ion

Overnight Repo Financial CP

16

Money Market Funds

0

500

1000

1500

2000

2500

0

500

1000

1500

2000

2500

Jan-08 Jul-08 Jan-09 Jul-09

Government

Billions of Dollars Billions of Dollars

Source: Moneyfundanalyzer Note: Shaded area September 16 - October 21

Prime

Figure 5: U.S. Money Market Fund Assets by Fund Type

Tax-free

17

Equity Equity Equity Equity

Equity

CP

etc. CNs*

Equity


Equity

Equity Equity Equity Equity Equity Equity









Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance

"Asset Flows"

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7

ABS Intermediation Wholesale FundingC

red

it P

ut

Cre

dit

Pu

t

Cre

dit

Pu

t

Cre

dit

Pu

t

(FDIC) (Private Credit Put) (Private Credit Put) (FRBNY) (Department of Treasury)

Debt Insurance

Premium Reserves

Premium Reserves

Premium Reserves

Mortgage Insurers Monoline InsurersTLGP Maiden Lane III, LLC TGPMMMF

Single-Seller Conduit Hybrid, Repo/TRS Conduits SIVs 2(a)-7 MMMFs(Loan Warehousing) (ABS Warehousing) (ABS Intermediation)

Loan Insurance

Premium Reserves

Bond Insuance

$1 NAV Puts

ReservesABS CDO

Cre

dit

Pu

t

MTNsRepos

...flow… ...flow… ....stock!

HELs ABCP

"Mezz" HEL ABS

Tranches

ABCP

"IG" ABS

CPABCP

AAA ABCDO

Under-writing Repos

"AuM"

Commercial Bank Broker-Dealer Broker-Dealer(Loan Origination) (ABS Structuring/Syndication) (CDO Structuring & Syndication)

HELs

Deposits Under-writing

Liq

uid

ity

Pu

t

Liq

uid

ity

Pu

t

Liq

uid

ity

Pu

t

CPFF

Flow… ...flow… ...flow…

Reserves Reserves

Discount Window

LoansReserves

ABCPReserves Reserves

Other Assets

CP

Federal Reserve

New Isssue AAA ABS

Existing ABS

"On-boarded"

US$ Assets

(Official LoLR) (FRBNY) (FRBNY)

Reserves

Reserves

AMLF

Maiden Lane II, LLC(FRBNY)

MMIFF(FRBNY)

Reserves

(FRBNY)

Money Market Instru-ments

AIG's Reinvest-

ment Portfolio

ABCP

CP

Liq

uid

ity

Pu

ts

Reserves

Client FundsOther

ActivitiesOther

Activities

Hol

ding

Com

pany

Subs

idiar

ies

(Shadow Bank "Deposits")

$1 NAV

Off

-Bala

nce

Shee

t

"S

had

ow

" V

ehicl

es/A

ctiv

ities

FH

C's

Cre

dit

In

term

edia

tio

n P

roce

ss

"O

rig

inat

e-to

-Dis

trib

ute

"

(FRBNY)(FRBNY) (FRBNY)

Liq

uid

ity

Pu

t

Liq

uid

ity

Pu

t

Liq

uid

ity

Pu

t

PDCFTAF and FX SwapsTSLF and Maiden Lane, LLCTALF

Tri-Party Collateral

Repos

Loans Loans Loans ABS ABS ABS CDO ABCP ABCP $1 NAV

"Funding Flows"


Official Backstops Official Backstops

Liquidity Backstops to the Shadow Banking System

18

Fed Liquidity Facilities

0

200

400

600

800

1,000

1,200

Sep-

07O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb-

08Ap

r-08

May

-08

Jun-

08Ju

l-08

Aug-

08Se

p-08

Oct

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr-

09M

ay-0

9Ju

l-09

Aug-

09Se

p-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10M

ar-1

0Ap

r-10

May

-10

Jun-

10Ju

l-10

Aug-

10Se

p-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

AMLF TSLF

TALF CPFF

PDCF TAF

Credit & Liquidity Programs1

September 2007 to March 3, 2011

Source: March 3, 2011 H.4.1 release. Differences in balances compared to other material in this presentation may be due to differences in timing or metrics1. AMLF - Asset-Backed Commercial Paper Money Market Fund (ABCP MMMF) Liquidity Facility; TSLF- Term Securities Lending Facility; TALF - Term Asset-

Backed Securities Loan Facility; CPFF -Commercial Paper Funding Facility; PDCF- Primary Dealer Credit Facility; and TAF - Term Auction Facility.2. Assets of the portfolio are exhibited and not the loans.

Lehm

an

Ban

krup

tcy

/AIG

Len

ding

TALF

an

noun

ced

JPM

C

acqu

isiti

on;

PDC

F/TS

LF

TAF

Esta

blis

hed

FR r

elea

ses

“Str

ess

Test

“ re

sults

19

� FAS 166/167 leads to consolidation of conduits on balance sheet� If the bank sponsors and provides backup liquidity to a conduit, it

must consolidate the loans or securities of the conduit onto its balance sheet, resulting in increased risk-based and leverage ratio capital requirements as well higher loan loss reserves

� Basel rules may significantly increase liquidity and capital requirements for bank backup lines of credit for conduits

� However, if the bank provides backup liquidity to a conduit sponsored by third-party, it can use an internal-model based approach (IAA) of the securitization framework

ABCP Regulation

20

� Industry Tri-Party Task Force focuses on the following areas:� Operational Arrangements� Dealer Liquidity Risk Management� Margining Practices� Contingency Planning� Transparency

� Supervision is improved due to data collection on:� Haircuts� Amount and type of repo funding by institutions� Collateral tracking in the triparty market

Triparty Repo Market Monitoring

21

Regulatory reform through new SEC 2a7 rules:

� Risk-limiting conditions: Liquidity, Securities, Repo

� New Procedural Requirements: Stress Testing, NRSRO diligence

� Transparency: Monthly filing of holdings and shadow NAV

� Operational Changes: Provisions for sponsor support, new rules on

suspensions

� Study of floating-rate NAV

Money Market Fund Monitoring

Documents

Monitoring Risks in the Shadow Banking Systemsiteresources.worldbank.org/FINANCIALSECTOR/...11th Annual International Seminar on Policy Challenges for the Financial Sector, 06/01/2011