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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, Maturity and Liquidity Transformation
Credit Transformation (Blending)
Credit, Maturity and Liquidity Transformation
Credit Transformation (Blending)
Credit, Maturity and Liquidity Transformation
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
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
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
Maturity and Liquidity Transformation
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
Credit, Maturity and Liquidity Transformation
Credit Transformation (Blending)
Credit, Maturity and Liquidity Transformation
ABS
Credit Transformation (Blending)
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
Credit, Maturity and Liquidity Transformation
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation
Credit, Maturity and Liquidity Transformation
...flow…
"Asset Flows"
...flow…
1010
Exhibit 18: Independent Specialists-Based Credit Intermediation Process - FHCs and DBDs Reliance on Independent Specialists
CP
etc. CNs*
CPMTNs MTNs MTNsEquity Equity Equity
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
Credit, Maturity and Liquidity Transformation
Credit, Maturity and Liquidity Transformation
Credit Transformation (Blending)
Credit, Maturity and Liquidity Transformation
Credit Transformation (Blending)
Credit, Maturity and Liquidity Transformation
Maturity and Liquidity Transformation
ABCP $1 NAV
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
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 (zoltan.pozsar@ny.frb.org)
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
*Unaffiliated with originators!
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
*Unaffiliated with originators!
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: Excess Cash
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*
*Broker-dealer affiliate
*Broker-dealer affiliate
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
*Broker-dealer affiliate
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
CPMTNs MTNs MTNsEquity Equity Equity
Equity
Equity Equity Equity Equity Equity Equity
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
Credit, Maturity and Liquidity Transformation
Credit, Maturity and Liquidity Transformation
Credit Transformation (Blending)
Credit, Maturity and Liquidity Transformation
Credit Transformation (Blending)
Credit, Maturity and Liquidity Transformation
Maturity and Liquidity Transformation
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"
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
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
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