shadow banking - federal reserve bank of new york

This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessar-ily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Federal Reserve Bank of New YorkStaff Reports

Staff Report No. 458July 2010

Revised February 2012

Zoltan PozsarTobias AdrianAdam AshcraftHayley Boesky

Shadow Banking

REPORTS

FRBNY

Staff

Adrian, Ashcraft: Federal Reserve Bank of New York. Pozsar: International Monetary Fund. Boesky: Bank of America Merrill Lynch. Address correspondence to Tobias Adrian (e-mail: [email protected]). The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

Abstract

The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation. Within the market-based financial system, “shadow banks” have served a critical role. Shadow banks are financial intermediaries that con-duct maturity, credit, and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, structured investment vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders, limited-purpose finance companies (LPFCs), and the government-sponsored enterprises (GSEs). Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system. Our de-scription and taxonomy of shadow bank entities and shadow bank activities are accom-panied by “shadow banking maps” that schematically represent the funding flows of the shadow banking system.

Key words: shadow banking, financial intermediation

Shadow BankingZoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley BoeskyFederal Reserve Bank of New York Staff Reports, no. 458July 2010: revised February 2012JEL classification: G20, G28, G01

`

The Federal Reserve Bank of New York, November, 2009

Short-Term Funding Short- to Long-Term Cash

MMDAsHouseholds, Businesses, Governments CDs

Equity Funding Long-Term Investments

Equity Equity

`

Equity

Short-Term Debt InstrumentsRegulated Money Market Unregulated Money Market

Agency MBS Agency Discount Notes Intermediaries Intermediaries

*Conforming mortgages RRsOther*

Liquidity Puts A1 *ARS, MMMFsA1 CP

AAA ABCPAA-BBB BDPEquity RRs

*Conforming student loans 2a-7 MMMFs Other*A1 *ARS, MMMFs, as well as A1

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

AAA BDP BDPAA-BBB RRs RRs Short-Term SavingsEquity Other* Other*

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

ABCPBDPRRs

Other*A1 AAA Offshore (non-2a-7) MMMFs *ARS, MMMFs, as well as A1

AAA AA-BBB A1 MTNs and term ABS CPABCP AA-BBB LTD MTNs CP ABCP

Equity Repo Equity Supers CNs* ABCP BDPLTD Haircuts BDP RRs

Households Equity O/C High-Yield CLOs RRs Ultra-Short Bond Funds Other* Households and Nonprofits(LBO Loans) Other* A1 *MMMFs

A1 *TOBs and VRDOs CPAAA ABCP

AA-BBB BDP2nd Lien Equity RRs

Equity O/C O/C O/C Other*CP *FHC affiliate Consumer ABS *ARS, MMMFs, as well as A1

ABCP (Credit Card ABS) MTNs and term ABS CPBDP A1 ABCP

AAA BDPAA-BBB RRs

Equity O/C Equity Other* Nonfinancial CorporatesO/C *ARS, MMMFs

an BanksDW

AAA TAFAA-BBB FX Swaps

LTD MTNs Tri-Party Repo System TSLFSupers CNs* Federal, State TSLF

Nonfinancial Businesses Equity Tri-Party Clearing Banks* and Local Governments PDCFCPFFTALFAMLFMMIFFML, LLC

Equity O/C O/C an Banks ML II, LLC

*BoNY and JP Morgan Chase ML III, LLC

LSAPs

RoWO/C Equity (Foreign Central Banks) Equity

RMBS(1st lien, private label) MTNs Cash Reinvestment Accounts

CP A1 A1ABCP AAA CPBDP AA-BBB ABCP

Equity BDP RoWGovernments RRs (Sovereign Wealth Funds)

Equity O/C Subprime ABS Other* *Done by custodian banks(2nd lien, subprime, HELOCs) Trading Book *MMMFs, MTNs, term ABS and on an agent basis.

A1 TOBs and VRDOsAAA

AA-BBBEquity

Haircuts Cash Reinvestment Accounts *Issued to central banksCMBS and High-Yield CLOs A1 in exchange for investibe FX

(LBO Loans) CP Long-Term SavingsA1 ABCP

AAA BDP Fixed Income Portfolios*AA-BBB RRs MTNs

Equity Equity Other* *Done by real money accounts*MMMFs, MTNs, term ABS and on a principal basis.

TOBs and VRDOs CNs*Bank, Shadow Bank and Corporate Debt

Consumer ABS(Card, Auto, Student Loan)

CP A1AAA Cash

AA-BBB MTNsEquity LTD Equity Portfolios*

Haircuts EquityEquity O/C Other ABS

(Floorplan, Equipment, Fleets)A1 AAA *Mutual Funds, ETFs, Separate Accounts

AAA AA-BBB *Bank and Corporate DebtAA-BBB MTNsEquity CNs*

O/CCP Middle-Market CLOs

ABCP (Loans to SMEs) Cash

LTD AA-BBB EquityEquity Equity Equity

*Term ABS and CDOdebt and equity tranches

Public Equity

CashMTNsLTD

Structured Credit EquityEquity

*Hedge Funds and Private Equity(only credit exposures)

Maiden Lane 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)

Equity

AA-BBBEquity Equity

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

Commercial Bank*

Step (7): Wholesale Funding (Shadow Bank "Depositors")

ABS Reserves

Warehouse Hedges

Long-Term Synthetic Liabilities Broker-dealer CVA desks, ABS pipeline hedges,

Counterparty Hedges Warehouse Hedges

Equity

Conceptualized, designed and created by Zoltan Pozsar ([email protected])

Debt Insu-rance

TLGP

Who

lesa

le F

undi

ng

(Ter

m D

ebt F

undi

ng)

*Funded by UST's $50 billion

No Explicit

Fees

GSEs, DoE, SBA Federal Government

Agency Debt PurchasesAgency MBS Purchases

Insurance Guarantees

Step (4): ABS Warehousing

Finance Company*

The "Synthetic" Shadow Banking System

Broker-Dealers*

Funded Synthetic CDOs*

Consumers

Finance Company*

Fannie and Freddie*

Credit Hedge Funds

(Credit-Linked Notes) Unfunded Synthetic CDOs*

Single-Name and Index

CDS Indices

Single-Name and Index

Assets Bond(s)

Sovereign CDS

Protection Bought

Protection Sold

Agency Debt Purchases

Proprietary trading desks, credit hedge funds, etc.

Term Savings

Commercial Banks

AA-BBB

Synthetic Exposures*Counterparty Risks*

Credit Bets

Term Savings

Hedgers*

Deposits

Bank EquityReal Money Accounts*

Equity Portfolios

Money Market "Portfolios"

Loans

The

Tra

ditio

nal B

anki

ng S

yste

m

("

Orig

inat

e-to

-Hol

d-to

-Mat

urity

-and

-Fun

d-w

ith-D

epos

its")

unfunded liabilities, etc.

Loans, ABS and

CDOs

Unfunded Protection

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

TreasurysCDS

AAA AAAAAA[…]

Equity

Loan(s)

Structured Credit and Loan

negative basis traders, real money accounts, etc.

Speculators*

Unfunded Protection Protection

Sold

*Market Makers

Funded Protection

"Naked" Positions

Funded ProtectionCounterparty Hedges

HedgesFunded

Protection *Referencing corporate loan indices, etc.*Hedging Motives

Insured Assets

*Speculative Motives

indices, etc.

Ultimate CreditorsBond(s) CDS

Unfunded Protection Protection

Sold[…]

CDS Counterparty Hedges

Funded Protection

Ultimate Borrowers Corporate CDS CDPCs CPDOs* Short-Term Synthetic Liabilities

Warehouse Hedges

Synthetic Credit Liabilities

Priv

ate

Ris

k R

epos

itori

es

The

"Sy

nthe

tic"

Shad

ow B

anki

ng S

yste

m

(Der

ivat

ives

-Bas

ed R

isk R

epos

itorie

s)

Warehouse Hedges

Loans, ABS and

CDOs

Counterparty Hedges Warehouse Hedges Warehouse and Counterparty Hedges

AAALoans, ABS and

CDOs

9/19/2008 10/21/2008 11/10/2008

Subprime ABS Reserves

ABCP RMBS

10/7/2008 11/25/2008 3/24/2008 10/11/2008 12/12/2007 12/12/2007

Tri-Party Collatera

lReserves ABCP Reserves

Non-repo MM instrume

nts

Reserves$ FXCP

Reserves AAA Reserves Warehoused ABS

ReservesCDS on

CDOsReserves

CPFF TALF Maiden Lane III LLC TAF FX Swaps TSLF/PDCF

Equity Equity

Priv

ate

Cre

dit T

rans

form

atio

n

(T

ail R

isk A

bsor

ptio

n)

Prov

isio

n of

Ris

k C

apita

l

Priv

ate

Ris

k R

epos

itori

es

*Unaffiliated with originators!

Credit Insurance (Mortgage Insurers)

Cre

dit H

edge

s

PremiaCredit

Insurance PremiaCredit

Insurance Premia

Credit Insurance (Par Puts)

Client Funds

Cre

dit "

Ref

eren

ces" Mortgage Insurers* Monoline Insurers*

*Unaffiliated with originators! *Unaffiliated with originators!

MTNs

Equity TranchesMezz

ABSSuper Senior

Credit Insurance (AIG FP)

Credit Insurance (AIG FP)

[…]

MTNsLTD

Loans

AAA (A4)

*Public and Private Pension Funds,

Debt Tranches

Pension Funds, Insurance Companies*

Structured Credit Portfolios*

Term Savings

HG ABS

Super Senior

Structured Credit

Credit Insurance (Monolines)

A4 and AA-BBB ABS Tranches

AAA

Diversified Insurance Co.

LPFCs

Client Funds

Long-Term Debt

Alternative Asset Managers*

Pension Liabilities

Captive Finance Company *Capital Notes

Loans

AA-BBBREITs

BDPMTN

*Independent conduitIndustrial Loan Company*

A1

Loans ABCP LoansCP

LTD

The

"E

xter

nal"

Sha

dow

Ban

king

Sys

tem

(DBD

s: O

rigin

ate-

to-D

istr

ibut

e Mod

el |

Inde

pend

ent S

peci

alist

s: O

rigin

ate-

to-F

und

Mod

el)

Repos

Off-

Bala

nce

Shee

tEquity Liquidity Puts*

A2 & A3 (AAA) ABS Tranches

Public Equity

Term SavingsABS

Agency LTD

Structured Credit

Long-Term nstruments (LTD)

Cash Collateral

ABCPLoans ABCP

MTNs LoansPrivate LTD

AA-BBB

*Broker-dealer affiliate *ARSs, TOBs, VRDOs *Medium-term debt

Inde

pend

ent S

peci

alis

ts' C

redi

t Int

erm

edia

tion

Proc

ess

Standalone Finance Company Credit Hedge Fund

LoansLoans

*Finance company affiliate

[…]

Term SavingsLTDs

Cash Collateral

Securities Lending*Agency Debt*

Who

lesa

le F

undi

ng

(M

ediu

m-T

erm

Fun

ding

)

Securities Lent

Loans AAA (A2-A3)

Cash Collateral

LoansLong-Term Munis

Short-Term Munis

LoansAgency DebtABS

Industrial Loan Company* AAALocal Governments

LoansBrokered Deposits

AA-BBB

Tax Revenues

Muni Bonds

Brokered Deposits

Brokerage Clients' Cash

Balances

FX Reserves Bonds*Mezzanine CDOs Super

SeniorsPrincipal Securities Lending

BBB

Supers

*Broker-dealer affiliate

Savings: Export

Revenue"Equity"

Tax Revenues

State Bonds

*Broker-dealer affiliate AA-BBB

Loans AA-BBB Repos

EquityTax Revenues Bonds

State Governments AAA Prime Broker

Super Seniors

Repos

Loans

*Broker-dealer affiliate

AAA

Securities Lent

AA-BBB ABSHigh-Grade CDOs

Asset Manager,Off-

Bala

nce

Shee

t

Securities Lending*

Supers

Private MTNs Cash

CollateralLoans ABCP

Federal Government

Tax Revenues

Treasury Bonds

Credit Hedge Fund*

Broker-Dealer*

Loans Repos

MTNs

OMO Collatera

l

Savings: FX

Reserves

Local Currency

Single-Seller Conduit

DB

Ds'

Cre

dit I

nter

med

iatio

n Pr

oces

s

Medium-Term Instruments Agent Securities Lending

Loans

AA-A

Private Equity

Euro Deposits

Portfolio Companies

Firms

ABCP

LBO Loans

*European bank affiliated

AAAABCP

Arbitrage Conduit

Assets

LoansBusinesses

Reverse Repos

CRE CRE Loans

LoansBonds

Europe

AA-BBB

Businesses Europe

Savings: Excess Cash

"Equity"

Federal Reserve

Invest- ments

C&I Loans

[…]Euro

Deposits

Reserves

Savings: Excess Cash

"Equity"

Who

lesa

le F

undi

ng

(Ove

rnig

ht F

undi

ng)

Mezz ABSMezz CDO

ABS Collateral

Eur

opea

n B

anks

' Sha

dow

Ban

king

Act

ivite

s

Cash lending for

securities collateral

Mezz CDO

The

"In

tern

al"

Shad

ow B

anki

ng S

yste

m

(P

rivat

e O

rigin

ate-

to-D

istr

ibut

e Mod

el)

CP

ABCP

*FHC affiliate *ARSs, TOBs, VRDOs

Multi-Seller Conduit*

Goods &

ServicesLoans Loans AA-BBB ABCP

LoansMTNs

Sweep Accounts

Long-Term Munis

Loans ABCP

Equity Liquidity Puts*

Off-

Bala

nce

Shee

t

AA-BBB

Loans

Structuring and

SyndicationLoans

Reverse Repos* ABCP

Equity AAA Savings: Excess Cash

BBB

SupersAAA

*BHC affiliate

"Equity"ABS

$1 NAV Shares

BDPs

BDPs

AssetsLoans

*FHC affiliate

ABCPHome1st Lien

Subprime Homeowners

$1 NAV Shares

AA-BBB Loans CP$1 NAV Shares$1 NAV

SharesHigh-Grade CDOs

AA-A

Supers *Capital Notes

$1 NAV Shares

SIV, SIV-Lite

Off-

Bala

nce

Shee

t

Home1st Lien Loans

Dollar Deposits

Loans

Securities

$1 NAV Shares

Direct Investmen Short-

Term Savings

FHC

s' C

redi

t Int

erm

edia

tion

Proc

ess

$1 NAV Shares

ReposCP

LoansABCP

AA-BBB

$1 NAV Shares

(Retained Portfolios)

Off-

Bala

nce

Shee

t

Loans*

Agency MBS

Discount Notes Loans A1Private

ABSAgency Debt

Munis ARSs TOBs

or VRDOs

FFELP ABS

Private ABS

Agency Debt

(Retained Portfolios)

CPABS

FH LBs Fannie and Freddie Cash "Plus" Funds

Agency Bills

The

Gov

ernm

ent-S

pons

ored

Sha

dow

Ban

king

Sys

tem

(P

ublic

Orig

inat

e-to

-Dis

trib

ute M

odel

)

Enhanced Cash Funds

$1 NAV Shares

Ultimate Borrowers CMOs Direct Money Market Investors Ultimate Creditors

Loans*

Agency Pass-

Throughs

Agency MBS

CMO Tranches

Corporate TreasurersA1

Off -Balance Sheet ABS Intermediation

On -Balance Sheet ABS Intermediation

The

GSE

s' C

redi

t Int

erm

edia

tion

Proc

ess

FHLBs

(Time-Tranched Agency MBS)

Federal Government

Off-

Bala

nce

Shee

t

Agency MBS

Discount Notes

MMMF Insurance

The "Cash" Shadow Banking System Deposit Insurance (FDIC)

Liability Insurance (Federal Government)

Credit Insurance (GSEs, DoE, SBA)

Liability Insurance (Federal Government)

Liability Insurance (EU Government)

Insurance Premia

Deposit Insurance

FDIC

No Explicit

Fees

No Explicit

Fees

Implicit Insurance

Federal Government

11/25/2008

Agency MBS Reserves

Deposit Insurance (FDIC)

Publ

ic R

isk

Rep

osito

ries

(T

ail R

isk A

bsor

ptio

n)

Publ

ic R

isk

Rep

osito

ries

Publ

ic C

redi

t Tra

nsfo

rmat

ion

(T

ail R

isk A

bsor

ptio

n)

European Sovereign andQuasi-Sovereign States

Bank Equity

11/25/2008

Temporary PBGC

Pension Funds

Client Funds

Dollar Deposits

Equ

ity F

undi

ng

Agency Debt Reserves

Discount Window

Loan Collateral

Agency Debt Reserves

Term SavingsT

radi

tiona

l Ban

ks' L

endi

ng P

roce

ss

Asset Managers*

Bank Treasurers

Bank EquityLoans

Bank Equity

LGIPs

Loans

Exchange Stabilization Fund

$1 NAV Shares

Insurance Premia

*Asset Managers, Insurance Companies and

ABS

Implicit Insurance

9/18/2008

MMMF Guarantee

Households, Businesses

Checking Account

and the Rest of the World

The Traditional Banking System

CDs

Ultimate CreditorsDepositors

Deposits Equity

Step (1): Loan Origination

TBA Market

Step (3): ABS Issuance

Short-Term

Savings

Ultimate Borrowers

Reserves

11/25/2008

No Explicit

Fees

Implicit Insurance

Deb

t Fun

ding

(S

hort

and

Long

-Ter

m D

epos

its

Implicit Insurance

Assets

Borrowers

Loans

Asset Manager*AAA

Loans

Checking Accounts

Who

lesa

le F

undi

ng

(S

hort-

Term

Fun

ding

)

AA-BBB Arbitrage Conduit

No Explicit

Fees

Implicit Insurance

SBA ABS

(ABS Warehouse Conduits)

Structuring and

Syndication


(Warehouse and Term)

SIV

Loans ABCP

(Warehouse and Term)

Loans

Loans

Discount Notes

Step (2): Loan Warehousing

Agency Debt

Equity

Step (5): ABS CDO Issuance

Loans*

*Capital Notes

Off-

Bala

nce

Shee

t

ABCPMezzanine CDOs

Off-

Bala

nce

Shee

t

AA-BBB

Short-Term Munis

LoansBrokered Deposits AAA

and Life and P&C Insurance Companies

CDOs

Subprime, RMBS, CMBS

[…]

Mezz ABS

Hybrid Conduits*FHC affiliated

Maiden Lane II LLCMMIFFAMLF

Trading Books

Catalogue:, Shadow Bank Liabilities

Step (6): ABS "Intermediation"

Trading Books

Repo Conduits

ABCP

Off-

Bala

nce

Shee

t

Loans

Bonds

Assets

"Prime" Homeowners

*DBD affiliate

Loans


Multi-Seller Conduit* Broker-Dealer*

Multi-Seller Conduit*

The Shadow Banking System

Loans

Bonds

("Rent-a-Conduit")

Broker Sweep Accounts


ABS and

CDO Equity

Loans

ABS

Loans

ABSEquity

Hybrid Conduits

ABCP

CP

1

1. Introduction

Shadow banks intermediate credit through a wide range of securitization and secured funding

techniques such as asset-backed commercial paper (ABCP), asset-backed securities (ABS),

collateralized debt obligations (CDOs) and repurchase agreements (repos). These securities are used

by specialized shadow bank intermediaries that are bound together along an intermediation chain.

We refer to the network of shadow banks in this intermediation chain as the shadow banking

system. While we believe that shadow banking is a somewhat pejorative name for such a large and

important part of the financial system, we adopt it in this paper.

Over the past decade, the shadow banking system provided sources of funding for credit by

converting opaque, risky, long-term assets into money-like, short-term liabilities. Arguably, maturity

and credit transformation in the shadow banking system contributed to the asset price appreciation

in residential and commercial real estate markets prior to the 2007-09 financial crisis. During the

financial crisis, the shadow banking system became severely strained and many parts of the system

collapsed. Credit creation through maturity, credit, and liquidity transformation can significantly

reduce the cost of credit relative to direct lending. However, credit intermediaries’ reliance on short-

term liabilities to fund illiquid long-term assets is an inherently fragile activity and may be prone to

runs.1

1 There is a large literature on bank runs modeled as multiple equilibria initiated by Diamond and Dybvig (1983). Morris and Shin (2004) provide a model of funding fragility with a unique equilibrium in a setting with higher order beliefs. Martin, Skeie and von Thadden (2011) provide a theory of runs in the repo market.

As the failure of credit intermediaries can have large, adverse effects on the real economy (see

Bernanke (1983) and Ashcraft (2005)), governments chose to shield them from the risks inherent in

reliance on short-term funding by granting them access to liquidity and credit put options in the

form of discount window access and deposit insurance, respectively.

2

Shadow banks conduct credit, maturity and liquidity transformation similar to traditional banks.

However, what distinguishes shadow banks from traditional banks is their lack of access to public

sources of liquidity such as the Federal Reserve’s discount window, or public sources of insurance

such as Federal Deposit Insurance. The emergency liquidity facilities launched by the Federal

Reserve and other government agencies’ guarantee schemes created during the financial crisis were

direct responses to the liquidity and capital shortfalls of shadow banks. These facilities effectively

provided a backstop to credit intermediation by the shadow banking system and to traditional banks

for their exposure to shadow banks.

In contrast to public-sector guarantees of the traditional banking system, prior to the onset of the

financial crisis of 2007-2009, the shadow banking system was presumed to be safe due to liquidity

and credit puts provided by the private sector. These puts underpinned the perceived risk-free,

highly liquid nature of most AAA-rated assets that collateralized credit repos and shadow banks’

liabilities more broadly. However, once private sector put providers’ solvency was questioned, even

if solvency was perfectly satisfactory in some cases, the confidence that underpinned the stability of

the shadow banking system vanished. The run on the shadow banking system, which began in the

summer of 2007 and peaked following the failure of Lehman in September and October 2008, was

stabilized only after the creation of a series of official liquidity facilities and credit guarantees that

replaced private sector guarantees entirely. In the interim, large portions of the shadow banking

system were eroded.

The failure of private sector guarantees to support the shadow banking system stemmed largely

from the underestimation of asset price correlations by every relevant party: credit rating agencies,

risk managers, investors, and regulators. Specifically, they did not account for the fact that the prices

of highly rated structured securities become much more correlated in extreme environments than in

3

normal times. In a major systemic event, the price behavior of diverse assets become highly

correlated as investors and levered institutions are forced to shed assets in order to generate the

liquidity necessary to meet margin calls (see Coval, Jurek and Stafford (2009)). Mark-to-market

leverage constraints result in pressure on market-based balance sheets (see Adrian and Shin (2010a),

and Geanakoplos (2010)). The underestimation of correlation enabled financial institutions to hold

insufficient amounts of liquidity and capital against the puts that underpinned the stability of the

shadow banking system, which made these puts unduly cheap to sell. As investors also

overestimated the value of private credit and liquidity enhancement purchased through these puts,

the result was an excess supply of cheap credit.

The AAA assets and liabilities that collateralized and funded the shadow banking system were the

product of a range of securitization and secured lending techniques. Securitization-based credit

intermediation process has the potential to increase the efficiency of credit intermediation.

However, securitization-based credit intermediation also creates agency problems which do not exist

when these activities are conducted within a bank. In fact, Ashcraft and Schuermann (2007)

document seven agency problems that arise in the securitization markets. If these agency problems

are not adequately mitigated with effective mechanisms, the financial system has weaker defenses

against the supply of poorly underwritten loans and aggressively structured securities.

Overviews of the shadow banking system are provided by Pozsar (2008) and Adrian and Shin

(2009). Pozsar (2008) catalogues different types of shadow banks and describes the asset and

funding flows within the shadow banking system. Adrian and Shin (2009) focus on the role of

security brokers and dealers in the shadow banking system, and discuss implications for financial

regulation. The term “shadow banking” was coined by McCulley (2007). Gertler and Boyd (1993)

4

and Corrigan (2000) are early discussions of the role of commercial banks and the market based

financial system in financial intermediation.

The contribution of the current paper is to focus on institutional details of the shadow banking

system, complementing a rapidly growing literature on the system’s collapse.. As such, our paper is

primarily descriptive, and focuses on funding flows in a somewhat mechanical manner. We believe

that the understanding of the plumbing of the shadow banking system is an important underpinning

of any study of systemic interlinkages within the financial system.

The remainder of the paper is organized as follows. Section 2 provides a definition of shadow

banking, and an estimate of the size of shadow banking activity. Section 3 discusses the seven steps

of the shadow credit intermediation process. Section 4 is by far the longest section of the paper,

describing the interaction of the shadow banking system with institutions such as bank holding

companies and broker dealers. Finally, section 5 concludes.

2. WHAT IS SHADOW CREDIT INTERMEDIATION?

2.1 Defining Shadow Banking

In the traditional banking system, intermediation between savers and borrowers occurs in a single

entity. Savers entrust their savings to banks in the form of deposits, which banks use to fund the

extension of loans to borrowers. Savers furthermore own the equity and debt issuance of the banks.

Relative to direct lending (that is, savers lending directly to borrowers), credit intermediation

provides savers with information and risk economies of scale by reducing the costs involved in

screening and monitoring borrowers and by facilitating investments in a more diverse loan portfolio.

5

Credit intermediation involves credit, maturity, and liquidity transformation. Credit transformation

refers to the enhancement of the credit quality of debt issued by the intermediary through the use of

priority of claims. For example, the credit quality of senior deposits is better than the credit quality

of the underlying loan portfolio due to the presence of junior equity. Maturity transformation refers

to the use of short-term deposits to fund long-term loans, which creates liquidity for the saver but

exposes the intermediary to rollover and duration risks. Liquidity transformation refers to the use of

liquid instruments to fund illiquid assets. For example, a pool of illiquid whole loans might trade at

a lower price than a liquid rated security secured by the same loan pool, as certification by a credible

rating agency would reduce information asymmetries between borrowers and savers.

Credit intermediation is frequently enhanced through the use of third-party liquidity and credit

guarantees, generally in the form of liquidity or credit put options. When these guarantees are

provided by the public sector, credit intermediation is said to be officially enhanced. For example,

credit intermediation performed by depository institutions is enhanced by credit and liquidity put

options provided through deposit insurance and access to central bank liquidity, respectively.

Exhibit 1 lays out the framework by which we analyze official enhancements.2

1. A liability with direct official enhancement must reside on a financial institution’s balance sheet,

while off-balance sheet liabilities of financial institutions are indirectly enhanced by the public

sector. Activities with direct and explicit official enhancement include on-balance sheet funding

Thus, official

enhancements to credit intermediation activities have four levels of “strength” and can be classified

as either direct or indirect, and either explicit or implicit.

2 The analysis of deposit insurance was formally analyzed by Merton (1977) and Merton and Bodie (1993).

6

of depository institutions; insurance policies and annuity contracts; the liabilities of most pension

funds; and debt guaranteed through public-sector lending programs.3

2. Activities with direct and implicit official enhancement include debt issued or guaranteed by the

government sponsored enterprises, which benefit from an implicit credit put to the taxpayer.

3. Activities with indirect official enhancement generally include for example the off-balance sheet

activities of depository institutions like unfunded credit card loan commitments and lines of

credit to conduits.

4. Finally, activities with indirect and implicit official enhancement include asset management

activities such as bank-affiliated hedge funds and money market mutual funds, and securities

lending activities of custodian banks. While financial intermediary liabilities with an explicit

enhancement benefit from official sector puts, liabilities enhanced with an implicit credit put

option might not benefit from such enhancements ex post.

In addition to credit intermediation activities that are enhanced by liquidity and credit puts provided

by the public sector, there exist a wide range of credit intermediation activities which take place

without official credit enhancements. These credit intermediation activities are said to be

unenhanced. For example, the securities lending activities of insurance companies, pension funds

and certain asset managers do not benefit from access to official liquidity.

We define shadow credit intermediation to include all credit intermediation activities that are

implicitly enhanced, indirectly enhanced or unenhanced by official guarantees (points 2.), 3.) and 4.)

from above). 3 Depository institutions, including commercial banks, thrifts, credit unions, federal savings banks and industrial loan companies, benefit from federal deposit insurance and access to official liquidity backstops from the discount window. Insurance companies benefit from guarantees provided by state guaranty associations. Defined benefit private pensions benefit from insurance provided by the Pension Benefit Guaranty Corporation (PBGC), and public pensions benefit from implicit insurance provided by their state, municipal, or federal sponsors. The Small Business Administration, Department of Education, and Federal Housing Administration each operate programs that provide explicit credit enhancement to private lending.

7

2.2 Sizing the Shadow Banking System

Before describing the shadow intermediation process in detail, we begin by reporting a gauge of the

size of shadow banking activity. Figure 1 provides two measures of the shadow banking system, net

and gross, both computed from the Federal Reserve Board’s flow of funds. The gross measure

sums all liabilities recorded in the flow of funds that relate to securitization activity (MBS, ABS, and

other GSE liabilities), as well as all short term money market transactions that are not backstopped

Exhibit 1: The Topology of Pre-Crisis Shadow Banking Activities and Shadow Bank Liabilities

Explicit Impilcit Explicit Implicit

Trust activitiesTri-party clearing10

Asset managementAffiliate borrowing

Federal Loan Programs (DoE, SBA and FHA credit puts) Loan guarantees3

Government Sponsored Enterprises (Fannie Mae, Freddie Mac, FHLBs)

Agency debt Agency MBS

Annuity liabilities4 Securities lending

Insurance policies5 CDS protecion sold

Pension Funds Unfunded liabilities6 Securities lending

MTNsTri-party repo12 Prime brokerage customer balances

Liquidity puts (ABS, TOB, VRDO, ARS)

Mortgage Insurers Financial guarantees

Financial guaranteesCDS protection sold on CDOs

Asset management (GICs, SIVs, conduits)

Shadow Banks

CP11

ABCP13

Single-Seller Conduits ABCP13 Extendible ABCP17 Extendible ABCP18

Multi-Seller Conduits ABCP13

Hybrid Conduits ABCP13 Extendible ABCP17 Extendible ABCP18

TRS/Repo Conduits ABCP13

Securities Arbitrage Conduits ABCP13 Extendible ABCP17 Extendible ABCP18

Structured Investment Vehicles (SIVs) ABCP13 MTNs, capital notes Extendible ABCP18

ABCP13 MTNs, capital notes Bi-lateral repo14 Bi-lateral repo15

Credit Hedge Funds (Standalones) Bi-lateral repo14 Bi-lateral repo15

Money Market Intermediaries (Shadow Bank "Depositors")

Money Market Mutual Funds $1 NAVOvernight Sweep Agreements $1 NAVCash "Plus" Funds $1 NAVEnhanced Cash Funds $1 NAVUltra-Short Bond Funds $1 NAVLocal Government Investment Pools (LGIPs) $1 NAVSecurities Lenders $1 NAV


Credit lines to shadow banks17

Insurance Companies

Diversified Broker-Dealers (Investment Bank Holding Companies)

Monoline Insurers

Direct Public Enhancement Indirect Public Enhancement

European Banks (Landesbanks, etc.)

Insured deposits1

Non-deposit liabilities2

Brokered deposits (ILCs)7

State guarantees8

Finance Companies (Standalones, Captives) Brokered deposits (ILCs)7

Limited Purpose Finance Companies

CP11

ABCP16

Term ABS, MTNs Extendible ABCP18

UnenhancedInstitution

Depository Institutions (Commercial Banks, Clearing Banks, ILCs)

Credit lines to shadow banks9

Increasingly "Shadow" Credit Intermediation Activities

8

by deposit insurance (repos, commercial paper, and other money market mutual fund liabilities).

The net measure attempts to remove the double counting.

Figure 1: Shadow Bank Liabilities vs. Traditional Bank Liabilities, $ trillion4

Source: Flow of Funds Accounts of the United States as of 2011:Q3 (FRB) and FRBNY.

We should point out that these measures of the shadow banking system are imperfect for several

reasons. First, the flow of funds does not cover the transactions of all shadow banking entities (see

Eichner, Kohn and Palumbo (2010) for data limitations of the flow of funds in detecting the

imbalances that built up prior to the financial crisis). Second, we are not providing a measure of the

net supply of credit of shadow banks to the real economy. In fact, the gross number is summing up

all shadow banking liabilities, irrespective of double counting. The gross number should not be 4 The chart uses data from the Flow of Funds Accounts of the United States. Traditional liabilities refer to the Total Liabilities of Commercial Banking reported in line 19 of Table L109, which includes U.S.-chartered commercial banks, foreign banking offices in U.S., bank holding companies, and banks in U.S.-affiliated areas. Shadow Liabilities refer to the sum of Open Market Paper from line 1 of Table L208, Overnight Repo from FRBNY, Net Securities Lending from line 20 of Table L130, GSE Total Liabilities from line 21 of Table L124, GSE Total Pool Securities from line 6 of Table L125, Total Liabilities of ABS issuers from line 11 of Table L126, and Total Shares Outstanding of Money Market Mutual Funds from line 13 of Table L121.

$0

$5

$10

$15

$20

$25 19

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Shadow Liabilities

Net Shadow Liabilities

Bank Liabilities

9

interpreted as a proxy for the net supply of credit by shadow banks, but rather as the gross total of

securities relating to shadow banking activities. The net number mitigates the second problem by

netting the money market funding of ABS and MBS. However, the net measure is not a measure of

the net supply of credit relating provided by shadow banking activities for many reasons. Third,

many of the securitized assets are held on the balance sheets of traditional depository and insurance

institutions, or supported off their balance sheets through backup liquidity and credit derivative or

reinsurance contracts. The holding of shadow liabilities by institutions inside the safety net makes it

difficult to draw bright lines between the traditional and shadow credit intermediation, and

prompting us to classify the latter at the instrument and not institution level.

As illustrated in Figure 1, the gross measure of shadow bank liabilities grew to a size of nearly $22

trillion in June 2007. We also plot total traditional banking liabilities in comparison, which were

around $14 trillion in 2007.5

The size of the shadow banking system has contracted substantially

since the peak in 2007. In comparison, total liabilities of the banking sector have continued to grow

throughout the crisis. The governmental liquidity facilities and guarantee schemes introduced since

the summer of 2007 helped ease the $5 trillion contraction in the size of the shadow banking system,

thereby protecting the broader economy from the dangers of a collapse in the supply of credit as the

financial crisis unfolded. While these programs were only temporary in nature, given the still

significant size of the shadow banking system and its inherent fragility due to exposure to runs by

wholesale funding providers, one open question is the extent to which some shadow banking

activities should have more permanent access to official backstops, and increased oversight, on a

more permanent basis.

5 Adrian and Shin (2010b) and Brunnermeier (2009) provide complementary overviews of the financial system in light of the financial crisis.

10

3. THE SHADOW CREDIT INTERMEDIATION PROCESS

The shadow banking system is organized around securitization and wholesale funding. In the

shadow banking system, loans, leases, and mortgages are securitized and thus become tradable

instruments. Funding is also in the form of tradable instruments, such as commercial paper and

repo. Savers hold money market balances, instead of deposits with banks.

Like the traditional banking system, the shadow banking system conducts credit intermediation.

However, unlike the traditional banking system, where credit intermediation is performed “under

one roof”—that of a bank—in the shadow banking system, it is performed through a daisy-chain of

non-bank financial intermediaries in a multi step process. These steps entail the “vertical slicing” of

traditional banks’ credit intermediation process and include (1) loan origination, (2) loan

warehousing, (3) ABS issuance, (4) ABS warehousing, (5) ABS CDO issuance, (6) ABS

“intermediation” and (7) wholesale funding. The shadow banking system performs these steps of

shadow credit intermediation in a strict, sequential order with each step performed by a specific type

of shadow bank and through a specific funding technique.

1. Loan origination (i.e. auto loans and leases, non-conforming mortgages, etc.) is performed by

finance companies which are funded through commercial paper (CP) and medium-term notes

(MTNs).

2. Loan warehousing is conducted by single- and multi-seller conduits and is funded through asset-

backed commercial paper (ABCP).

3. The pooling and structuring of loans into term asset-backed securities (ABS) is conducted by broker-

dealers’ ABS syndicate desks.

4. ABS warehousing is facilitated through trading books and is funded through repurchase

agreements (repo), total return swaps or hybrid and repo/TRS conduits.

11

5. The pooling and structuring of ABS into CDOs is also conducted by broker-dealers’ ABS syndicate

desks.

6. ABS intermediation is performed by limited purpose finance companies (LPFCs), structured

investment vehicles (SIVs), securities arbitrage conduits and credit hedge funds, which are

funded in a variety of ways including for example repo, ABCP, MTNs, bonds and capital notes.

7. The funding of all the above activities and entities is conducted in wholesale funding markets by

funding providers such as regulated and unregulated money market intermediaries (for example,

2(a)-7 MMMFs and enhanced cash funds, respectively) and direct money market investors (such

as securities lenders). In addition to these cash investors, which fund shadow banks through

short-term repo, CP and ABCP instruments, fixed income mutual funds, pension funds and

insurance companies also fund shadow banks by investing in their longer-term MTNs and

bonds.

The shadow credit intermediation process conducts an economic role that is analogous to the credit

intermediation process performed by banks in the traditional banking system. The shadow banking

system decomposes the simple process of deposit-funded, hold-to-maturity lending conducted by

banks into a more complex, wholesale-funded, securitization-based lending process. Through this

intermediation process, the shadow banking system transforms risky, long-term loans (subprime

Exhibit 2: The Steps, Entities and Funding Techinques Involved in Shadow Credit Intermediation - Illustrative Examples

Function Shadow Banks Shadow Banks' Funding*

Step (1) Loan Origination Finance companies CP, MTNs, bondsStep (2) Loan Warehousing Single and multi-seller conduits ABCPStep (3) ABS Issuance SPVs, structured by broker-dealers ABSStep (4) ABS Warehousing Hybrid, TRS/repo conduits, broker-dealers' trading books ABCP, repoStep (5) ABS CDO Issuance SPVs, structured by broker-dealers ABS CDOs, CDO-squaredsStep (6) ABS Intermediation LPFCs, SIVs, securities arbitrage conduits, credit hedge funds ABCP, MTN, repoStep (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lenders, etc. $1 NAV shares (shadow bank "deposits")

*Funding types highlighted in red denote securitized funding techniques. Securitized funding techniques are not synonymous with secured funding.


12

mortgages, for example) into seemingly credit-risk free, short-term, money-like instruments, stable

net asset value (NAV) shares that are issued by 2(a)-7 money market mutual funds which require

daily liquidity. This crucial point is illustrated by the first and last links in Exhibit 3 depicting the

asset and funding flows of the credit intermediation process of the shadow banking system.

Importantly, not all intermediation chains involve all seven steps, and some might involve even

more steps. For example, an intermediation chain might stop at “Step 2” if a pool of prime auto

loans is sold by a captive finance company to a bank-sponsored multi-seller conduit for term

warehousing purposes. In another example, ABS CDOs could be further repackaged into a

CDO^2, which would elongate the intermediation chain to include eight steps. Typically, the poorer

an underlying loan pool’s quality at the beginning of the chain (for example a pool of subprime

mortgages originated in California in 2006), the longer the credit intermediation chain that would be

required to “polish” the quality of the underlying loans to the standards of money market mutual

funds and similar funds. As a rule of thumb, the intermediation of low-quality long-term loans

(non-conforming mortgages) involved all seven or more steps, whereas the intermediation of high-

quality short- to medium-term loans (credit card and auto loans) involved usually three steps (and

rarely more). The intermediation chain always starts with origination and ends with wholesale

funding, and each shadow bank appears only once in the process.

Exhibit 3: The Shadow Credit Intermediation Process


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"

13

4. THE SHADOW BANKING SYSTEM

We identify the three distinct subgroups of the shadow banking system. These are: (1) the

government-sponsored shadow banking sub-system; (2) the “internal” shadow banking sub-system;

and (3) the “external” shadow banking sub-system. We also discuss the liquidity backstops that were

put in place during the financial crisis.

4.1 The Government-Sponsored Shadow Banking Sub-System

The seeds of the shadow banking system were sown nearly 80 years ago, with the creation the

government-sponsored enterprises (GSE), which are comprised of the FHLB system (1932), Fannie

Mae (1938) and Freddie Mac (1970). The GSEs have dramatically impacted the way in which banks

fund are funded and conduct credit transformation: the FHLBs were the first providers of term

warehousing of loans, and Fannie Mae and Freddie Mac were cradles of the originate-to-distribute

model of securitized credit intermediation.

Exhibit 4: The Steps, Entities and Funding Techniques Involved in the GSEs' Credit Intermediation Process

Like banks, the GSEs fund their loan and securities portfolios with a maturity mismatch. Unlike

banks, however, the GSEs are not funded using deposits, but through capital markets, where they

issue short and long-term agency debt securities. These agency debt securities are bought by money

market investors and real money investors such as fixed income mutual funds. The funding


Step (1) Mortgage Origination Commercial banks Deposits, CP, MTNs, bondsStep (2) Mortgage Warehousing FHLBs Agency debt and discount notesStep (3) ABS Issuance Fannie Mae, Freddie Mac through the TBA market Agency MBS (passthroughs)Step (4) ABS Warehousing Broker-dealers' trading books ABCP, repoStep (5) ABS CDO Issuance Broker-dealer agency MBS desks CMOs (resecuritizations)Step (6) ABS Intermediation GSE retained portfolios Agency debt and discount notesStep (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lenders $1 NAV shares (GSE "deposits")



14

functions performed by the GSEs on behalf of banks and the way in which GSEs are funded are the

models for wholesale funding markets (see Exhibit 4 and Appendix 1).

The GSEs have embodied four intermediation techniques:

1. Term loan warehousing provided to banks by the FHLBs.

2. Credit risk transfer and transformation through credit insurance provided by Fannie Mae and

Freddie Mac.

3. Originate-to-distribute securitization functions provided for banks by Fannie Mae and Freddie

Mac.

4. Maturity transformation conducted through the GSE retained portfolios, which operate not

unlike SIVs.6

Over the past thirty years or so, these four techniques have became widely adopted by banks and

non-banks in their credit intermediation and funding practices. The adaptation of these techniques

fundamentally changed the bank-based, originate-to-hold credit intermediation process and gave rise

to the securitization-based, originate-to-distribute credit intermediation process.

Fannie Mae was privatized in 1968 in order to reduce government debt. Privatization removed

Fannie from the government’s balance sheet, yet it continued to have a close relationship with it and

carry out certain policy mandates. Arguably, it also enjoyed an implicit government guarantee. This

was similar to the off-balance sheet private shadow banks that were backstopped through liquidity

guarantees by their sponsoring banks.

6 Not unlike SIVs, all GSE debt and guarantees are off balance sheet to the federal government. No provisions are made for capital needs and balance sheet risks, and the GSEs are excluded from the federal budget. Their off-balance sheet nature is the same as those of bank sponsored SIVs and securities arbitrage conduits that had to be rescued by their sponsor banks. The GSE’s are off-balance sheet shadow banks of the federal government.

15

The government-sponsored shadow banking sub-system is not involved in loan origination, only

loan processing and funding.7 These entities qualify as shadow banks to the extent that they are

involved in the traditional bank activities of credit, maturity, or liquidity transformation, but without

actually being chartered as banks and without having a meaningful access to a lender of last resort

and an explicit insurance of their liabilities by the federal government.8

4.2. The “Internal” Shadow Banking Sub-System

The development of the GSEs’ activities described above has been mirrored by the evolution of a

full-fledged shadow banking system over the past 30 years. The shadow banking system emerged

from the transformation of the largest banks from low return on-equity (RoE) utilities that originate

loans and hold and fund them until maturity with deposits, to high RoE entities that originate loans

in order to warehouse and later securitize and distribute them, or retain securitized loans through

off-balance sheet asset management vehicles. In conjunction with this transformation, the nature of

banking has changed from a credit-risk intensive, deposit-funded, spread-based process, to a less

credit-risk intensive, but more market-risk intensive, wholesale funded, fee-based process.

The vertical and horizontal slicing of credit intermediation is conducted through the application of a

range of off-balance sheet securitization and asset management techniques (see Exhibit 5), which

enable FHC-affiliated banks to conduct lending with less capital than if they had retained loans on

their balance sheets. This process enhances the RoE of banks, or more precisely, the RoE of their

holding companies.

7 The GSEs are prohibited from loan origination by design. The GSEs create a secondary market for mortgages to facilitate the funding of mortgages. 8 Note that Fannie and Freddie had some explicit backstops from the U.S. Treasury in the form of credit lines prior to their conservatorship in 2008. However, these liquidity backstops were very small compared to the size of their balance sheets.

16

Exhibit 5: The Steps, Entities and Funding Techniques Involved in FHCs' Credit Intermediation Process

Thus, whereas a traditional bank would conduct the origination, funding and risk management of

loans on one balance sheet (its own), an FHC (1) originates loans in its bank subsidiary, (2)

warehouses and accumulates loans in an off-balance sheet conduit that is managed by its broker-

dealer subsidiary, is funded through wholesale funding markets, and is liquidity-enhanced by the

bank, (3) securitizes loans via its broker-dealer subsidiary by transferring them from the conduit into

a bankruptcy-remote SPV, and (4) funds the safest tranches of structured credit assets in an off-

balance sheet ABS intermediary (a structured investment vehicle (SIV), for example) that is managed

from the asset management subsidiary of the holding company, is funded through wholesale funding

markets and is backstopped by the bank (see Appendix 2).

This process highlights three important aspects of the changed nature of lending in the U.S.

financial system, especially for residential and commercial mortgage credit. First, the process of

lending and the uninterrupted flow of credit to the real economy is no longer reliant on banks only,

but on a process that spanned a network of banks, broker-dealers, asset managers and shadow

banks—all under the umbrella of FHCs—funded through wholesale funding and capital markets

globally. Second, a bank subsidiary’s only direct involvement in an FHC’s credit intermediation

process is at the loan origination level. Its indirect involvements are broader, however, as it acts as a

lender to the subsidiaries and off-balance sheet shadow banks involved in the warehousing and


Step (1) Loan Origination Commercial bank subsidiary Deposits, CP, MTNs, bondsStep (2) Loan Warehousing Single/multi-seller conduits ABCPStep (3) ABS Issuance SPVs, structured by broker-dealer subsidiary ABSStep (4) ABS Warehousing Hybrid, TRS/repo conduits, broker-dealers' trading books ABCP, repoStep (5) ABS CDO Issuance SPVs, structured by broker-dealer subsidiary ABS CDOs, CDO-squaredsStep (6) ABS Intermediation SIVs, internal credit hedge funds (asset management) ABCP, MTN, capital notes and repoStep (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lending subs. $1 NAV shares (shadow bank "deposits")



17

processing of loans, and the distribution and funding of structured credit securities. Despite the fact

that FHC’s credit intermediation process depends on at least four entities other than the bank, only

the bank subsidiary of an FHC has access to the Federal Reserve's discount window and benefits

from deposit insurance. Third, lending has become capital efficient, fee-rich, high-RoE endeavor

for originators, structurers and ABS investors. As the financial crisis of 2007-2009 shows, however,

the capital efficiency of the process is highly dependent on liquid wholesale funding and debt capital

markets globally. Paralysis in markets can thus turn banks’ capital efficiency to capital deficiency, with

systemic consequences.

This interpretation of the workings of FHCs is different from the one that emphasizes the benefits

of FHCs as “financial supermarkets”. According to that widely-held view, the diversification of the

holding companies’ revenues through broker-dealer and asset management activities makes the

banking business more stable, as the holding companies’ banks, if need be, could be supported by

net income from other operations during times of credit losses. In our interpretation, the broker-

dealer and asset management activities are not parallel, but serial and complementary activities to

FHCs’ banking activities.

4.3 The “External” Shadow Banking Sub-System

Similar to the “internal” shadow banking sub-system, the “external” shadow banking sub-system is a

global network of balance sheets, with the origination, warehousing and securitization of loans

conducted mainly from the U.S., and the funding and maturity transformation of structured credit

assets conducted from the U.S., but also from Europe and offshore financial centers. However,

unlike the “internal” sub-system, the “external” sub-system is less of a product of regulatory

arbitrage, and more a product of vertical integration and gains from specialization. The “external”

shadow banking sub-system is defined by (1) the credit intermediation process of diversified broker-

18

dealers; (2) the credit intermediation process of independent, non-bank specialist intermediaries; and

(3) the credit puts provided by private credit risk repositories.

4.3.1 The Credit Intermediation Process of Diversified Broker-Dealers

We refer to the standalone investment banks as they existed prior to 2008 as diversified broker-

dealers (DBD). The DBDs vertically integrate their securitization businesses (from origination to

funding), lending platforms, and asset management units. The credit intermediation process of

DBDs is similar to those of FHCs (see Exhibit 6):

Exhibit 6: The Steps, Entities and Funding Techniques Involved in DBDs' Credit Intermediation Process

The diversified broker dealers are distinguished by the fact that they do not own commercial bank

subsidiaries. Most of the major standalone investment banks did, however, own industrial loan

company (ILC) subsidiaries. Since running one’s own loan warehouses (single- or multi-seller loan

conduits) requires large bank subsidiaries to fund the contingent liquidity backstops that enhance the

ABCP issued by the conduits, broker-dealers typically outsourced these warehousing functions to

FHCs with large deposit bases, or to independent multi-seller, hybrid or TRS conduits. At the end

of their intermediation chains, DBDs don’t operate securities arbitrage conduits or SIVs. Instead,

internal credit hedge funds, trading books and repo conduits act as funding vehicles. Partly due to

this reason, the DBDs’ intermediation process tends to be more reliant on repo funding than that of

FHCs’, which relied on CP, ABCP, MTNs and repos. The types of credit intermediated by

diversified broker-dealers is similar to FHCs, with the exception that they do not originate credit


Step (1) Loan Origination Finance company subsidiary CP, MTNs, bondsStep (2) Loan Warehousing Independent multi-seller conduits ABCPStep (3) ABS Issuance SPVs, structured by broker-dealer subsidiary ABSStep (4) ABS Warehousing Hybrid, TRS/repo conduits, broker-dealers' trading books ABCP, repoStep (5) ABS CDO Issuance SPVs, structured by broker-dealer subsidiary ABS CDOs, CDO-squaredsStep (6) ABS Intermediation Internal credit hedge funds, proprietary trading desks RepoStep (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lending subs. $1 NAV shares (shadow bank "deposits")



19

card loans (which are the near-exclusive domain of FHCs) and are less prominent lenders of

conforming mortgages, FFELP student loans and SBA loans.

Prior to the creation of the Primary Dealer Credit Facility, the only DBD subsidiaries that were

backstopped by the Federal Reserve or the FDIC were the ILC and FSB subsidiaries. The

numerous other subsidiaries that are involved in the origination, processing and movement of loans

and structured credits as they pass through DBDs’ credit intermediation process do not have direct

access to these public enhancements.

It should be noted that the credit intermediation processes described here are the simplest and

shortest forms of the intermediation chains that run through FHCs and DBDs. In practice, these

processes are often elongated by additional steps involved in the warehousing, processing and

distribution of unsold ABS into ABS CDOs (also see Appendix 3).

4.3.2 The Independent Specialists-Based Credit Intermediation Process

The credit intermediation process that runs through a network of independent, specialist non-bank

financial intermediaries perform the very same credit intermediation functions as those performed

by traditional banks or the credit intermediation processes of FHCs and DBDs. The independent

specialists-based intermediation process includes the following types of entities: stand-alone and

captive finance companies on the loan origination side9

9 Captive finance companies are finance companies that are owned by non-financial corporations. Captive finance companies are typically affiliated with manufacturing companies, but might also be affiliated with homebuilders as well, for example. Captive finance companies are used to provide vendor financing services for their manufacturing parents’ wares. Some captive finance companies are unique in that they are do not finance solely the sale of their parent’s wares, but instead a wide-range of loan types, many of which are hard, or impossible for banks to be active in. Captive finance companies often benefit from the highly-rated nature of their parents, which gives them access to unsecured funding at competitive terms. Stand alone finance companies, as the name suggests stand on their own and are not subsidiaries of any other corporate entity.

; independent multi-seller conduits on the

20

loan warehousing side; and limited purpose finance companies (LPFCs), independent SIVs and

credit hedge funds on the ABS intermediation side (see Exhibit 7).

Exhibit 7: The Steps, Entities and Funding Techniques Involved in the Independent Specialists-Based Credit Intermediation Process

There are three key differences between the independent specialists-based credit intermediation

process and those of FHCs and DBDs. First, and foremost, on the origination side, these three

processes intermediate different types of credit. The FHC and DBD-based processes originate

some combination of both conforming and non-conforming mortgages, as well as commercial

mortgages, leveraged loans and credit card loans. In contrast, the independent specialists-based

process tends to specialize in the origination of auto and equipment loans and leases, middle-market

loans, franchise loans and more esoteric loans in which traditional banks and FHCs becomes less

and less active over time. The obvious exceptions to this are standalone non-conforming mortgage

finance companies, which are largely extinct since the crisis.10

10 It is fair to say that the independent specialists-based credit intermediation process became collateral damage in the collapse of standalone subprime mortgage originators and subprime securitizations.

The independent specialists-based

credit intermediation process is based on an “originate-to-fund” (again, with the exception of the

now extinct standalone mortgage finance companies) as opposed to the mostly “originate-to-

distribute” model of the government-sponsored shadow banking sub-system and FHCs’ and DBDs’

credit intermediation process. While the GSE, FHC and DBD-based credit intermediation


Step (1) Loan Origination Standalone and captive finance companies CP, MTNs and bondsStep (2) Loan Warehousing FHC-sponsored and independent multi-seller conduits ABCPStep (3) ABS Issuance SPVs, structured by broker-dealers ABSStep (4) ABS Warehousing - ABCP, repoStep (5) ABS CDO Issuance - ABS CDOs, CDO-squaredsStep (6) ABS Intermediation LPFCs, independent SIVs, independent credit hedge funds ABCP, MTN, capital notes and repoStep (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lenders. $1 NAV shares (shadow bank "deposits")



21

processes are heavily dependent on liquid capital markets for their ability to fund, securitize and

distribute their loans, independent specialists’ seamless functioning is also exposed to DBDs’ and

FHCs’ abilities to perform their functions as gatekeepers to capital markets and lenders of last

resort, respectively. This in turn represents an extra layer of fragility in the structure of the

independent specialists-based credit intermediation process, as failure by FHCs and DBDs to

perform these functions in times of systemic stress ran the risk of paralyzing and disabling the

independent specialists-based intermediation process (see Rajan (2005)). Indeed, this fragility

became apparent during the financial crisis of 2007-2009 as the independent specialists-based

process broke down, and with it the flow of corresponding types of credit to the real economy.

Appendix 4 shows the relative extent to which specialist loan originators (captive and independent

finance companies) relied on FHCs and DBDs as their ABS underwriters and gatekeepers to capital

markets.

4.3.3 Private Credit Risk Repositories

While the credit intermediation process of independent specialists is highly reliant on FHCs and

DBDs, FHCs and DBDs in turn rely heavily on private credit risk repositories to perform originate-

to-distribute securitizations (see Appendix 5). Private risk repositories specialize in providing credit

transformation services in the shadow banking system, and include mortgage insurers, monoline

insurers, certain subsidiaries of large, diversified insurance companies, credit hedge funds and credit

derivative product companies. These entities, as investors in the junior equity and mezzanine

tranches of loan pools, all provide risk capital to the shadow banking system, thereby supporting

credit extension to the real economy.

Different credit risk repositories correspond to specific stages of the shadow credit intermediation

process. As such, mortgage insurers specialize in insuring, or wrapping whole mortgage loans;

22

monoline insurers specialize in wrapping ABS tranches (or the loans backing a specific ABS

tranches); and large, diversified insurance companies, credit hedge funds and credit derivative

product companies specialize in taking on the risks of ABS CDO tranches through CDS.11

Effectively, the various forms of credit put options provided by private risk repositories absorbs tail

risk from loan pools, turning the enhanced securities into credit-risk free securities (at least from

investors’ perception prior to the crisis). This in turn means that any liability that issued against

these assets is perceived to be credit-risk free as well, as if it is FDIC-insured.

There

are also overlaps, with some monolines wrapping both ABS and ABS CDOs, for example.

The perceived, credit-risk free nature of traditional banks’ and shadow banks’ liabilities stem from

two very different sources. In the case of traditional banks’ insured liabilities (deposits), the credit

quality is driven by the counterparty—the U.S. taxpayer. As a result, insured depositors invest less

effort into examining a bank’s creditworthiness before depositing money than if they are uninsured.

In the case of shadow banks’ liabilities (repo or ABCP, for example), perceived credit quality is

driven by the “credit-risk free” nature of collateral that backs shadow bank liabilities, as it is often

enhanced by private credit risk repositories.

The credit puts provided by private credit risk repositories are alternatives to the credit

transformation performed by (1) the credit risk-based calibration of advance rates and attachment

points on loan pools backing top-rated ABCP and ABS tranches, respectively; (2) the credit risk-

based calibration of haircuts on collateral backing repo transactions; (3) the capital notes supporting

LPFCs’ and SIVs portfolios of assets, and (4) the pooling and re-packaging of non-AAA rated term

11 CDS were also used for hedging warehouse and counterparty exposures. For example a broker-dealer with a large exposure to subprime MBS that it warehoused for an ABS CDO deal in the making could purchase CDS protection on its MBS warehouse. In turn, the broker-dealer could also purchase protection (a counterparty hedge) from a credit hedge fund or CDPC on the counterparty providing the CDS protection on subprime MBS.

23

ABS into ABS CDOs. The credit puts of private credit risk repositories are also similar in function

to the wraps provided by Fannie Mae and Freddie Mac on conforming mortgage pools.12

4.4 The “Parallel” Banking System

Just as

these government-sponsored, public credit risk repositories “borrowed” the AAA-rating of the

federal government to pools of mortgage loans (turning them into credit risk-free rate products), the

private credit risk repositories were effectively “borrowing” the AAA-rating of their parent.

Many “internal” and “external” shadow banks exist in a form that is only possible due to special

circumstances in the run up to the financial crisis—some economic in nature and some due to

regulatory and risk management failures. However, there are also many examples of shadow banks

that exist due to gains from specialization and comparative advantage over traditional banks. Such

shadow banks were not driven by regulatory arbitrage, but by gains from specialization as a

“parallel” banking system. Most (but not all) of these entities can be found in the “external” shadow

banking sub-system.

These entities include non-bank finance companies, which can be more efficient than traditional

banks through specialization and economies of scale in the origination, servicing, structuring, trading

and funding of loans to both bankable and non-bankable credits.13

12 Credit wraps come in different forms and guarantee the timely payment of principal and interest on an underlying debt obligation.

For example, finance companies

have traditionally served subprime credit card or auto loan customers, or low-rated corporate credits

like the commercial airlines, which are not served by banks. Furthermore, some ABS intermediaries

could fund highly-rated structured credit assets at lower cost and lower levels of leverage than banks

with high RoE targets.

13 Carey, Post, and Sharpe (1998) document the specialization of finance companies among riskier borrowers.

24

Over the last thirty years, market forces have pushed a number of activities outside of banks and

into the parallel banking system. It remains an open question whether or not the “parallel” banking

system will ever be stable through credit cycles in the absence of official credit and liquidity puts. If

the answer is no, then there are questions about whether or not such puts and the associated

prudential controls should be extended to parallel banks, or, alternatively, whether or not parallel

banking activity should be severely restricted. For a spectrum of shadow banking activities by type,

see Appendix 6.

4.5 BACKSTOPPING THE SHADOW BANKING SYSTEM

The Federal Reserve’s 13(3) emergency lending facilities that followed in the wake of Lehman’s

bankruptcy amount to a backstop of all the functional steps involved in the shadow credit

intermediation process. The facilities introduced during the crisis were an explicit recognition of the

need to channel emergency funds into “internal”, “external” and government-sponsored shadow

banking sub-systems (for a pre- and post-crisis backstop of shadow banks see Appendixes 7 and 8).

As such, the Commercial Paper Funding Facility (CPFF) was a backstop of the CP and ABCP

issuance of loan originators and loan warehouses, respectively (steps 1 and 2 of the shadow credit

intermediation process); the Term Asset-Backed Loan Facility (TALF) is a backstop of ABS issuance

(step 3); Maiden Lane LLC was a backstop of Bear Stearns’ ABS warehouse, while the Term

Securities Lending Facility (TSLF) was a means to improve the average quality of broker-dealers

securities warehouses through swapping ABS for Treasuries (step 4); Maiden Lane III LLC was a

backstop of AIG-Financial Products’ credit puts on ABS CDOs (step 5); and the Term Auction

Facility (TAF) and the FX swaps with foreign central banks were meant to facilitate the

25

“onboarding” and on-balance sheet, dollar funding of the ABS portfolios of formerly off-balance

sheet ABS intermediaries—mainly SIVs and securities arbitrage conduits (step 6).1415

Finally, the Primary Dealer Credit Facility (PDCF) was a backstop of the tri-party repo system

through which MMMFs and other funds fund broker-dealers in wholesale funding markets

overnight, and the AMLF and the Money Market Investor Funding Facility (MMIFF) served as

liquidity backstops of regulated and unregulated money market intermediaries, respectively (step 7).

Similarly, the FDIC’s Temporary Liquidity Guarantee Program that covered (1) various bank and

non-bank financial institutions’ senior unsecured debt, (2) corporations’ non-interest bearing deposit

transaction accounts, regardless of dollar amount, and (3) the U.S. Department of Treasury’s

temporary guarantee program of retail and institutional money market mutual funds were also

backstops to the funding of the shadow banking system, and are all modern-day equivalents of

deposit insurance. Upon the full rollout of the liquidity facilities, large-scale asset purchases and

guarantee schemes, the shadow banking system was fully embraced by official credit and liquidity

puts, and became fully backstopped, just like the traditional banking system. As a result, the run on

it was fully checked.

14 The CPFF is documented in detail by Adrian, Marchioni, Kimbrough (2009); TSLF is described by Fleming, Hrung, Keane (2009); TALF is described by Campbell, Covitz, Nelson, Pence (2011) and Ashcraft, Malz, Pozsar (2010); the PDCF is in Adrian, Burke, and McAndrews (2009); TAF is in Armentier, Krieger, McAndrews (2008). 15 The TAF facility was only available to bank or FHC-affiliated ABS intermediaries. Standalone ABS intermediaries (LPFCs and independently managed SIVs and securities arbitrage conduits) and the ABS intermediaries of pension funds, insurance companies and monoline insurers did not benefit from “intermediated” access to the discount window.

26

5. CONCLUSIONS

We document the specialized financial institutions of the shadow banking system, and argue that

these specialized financial intermediaries played a quantitatively important role in the run-up to the

financial crisis. Shadow credit intermediation includes three broad types of activities, differentiated

by their strength of official enhancement: implicitly-enhanced, indirectly-enhanced, and unenhanced.

The shadow banking system has three sub-systems which intermediate different types of credit, in

fundamentally different ways. The government-sponsored shadow banking sub-system refers to

credit intermediation activities funded through the sale of Agency debt and MBS, which mainly

includes conforming residential and commercial mortgages. The “internal” shadow banking sub-

system refers to the credit intermediation process of a global network of banks, finance companies,

broker-dealers and asset managers and their on- and off-balance sheet activities—all under the

umbrella of financial holding companies. Finally, the “external” shadow banking sub-system refers

to the credit intermediation process of diversified broker-dealers (DBDs), and a global network of

independent, non-bank financial specialists that include captive and standalone finance companies,

limited purpose finance companies and asset managers. While much of the current and future

reform effort is focused remediating the excesses of the recent credit bubble, we note that increased

capital and liquidity standards for depository institutions and insurance companies are likely to

increase the returns to shadow banking activity.For example, as pointed out in Pozsar (2011), the

reform effort has done little to address tendency for large institutional cash pools to form outside

the banking system. Thus, we expect shadow banking to be a significant part of the financial system,

though almost certainly in a different form, for the foreseeable future.

27

REFERENCES

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Adrian, Tobias, Dina Marchioni and Karin Kimbrough (2009): “The Federal Reserve’s Commercial Paper Funding Facility,” Federal Reserve Bank of New York Economic Policy Review, forthcoming.

Adrian, Tobias and Hyun Song Shin (2009): “The Shadow Banking System: Implications for Financial Regulation,” Banque de France Financial Stability Review 13, pp. 1-10.

Adrian, Tobias and Hyun Song Shin (2010a): “Liquidity and Leverage,” Journal of Financial Intermediation 19(3) pp. 418—437.

Adrian, Tobias and Hyun Song Shin (2010b): “The Changing Nature of Financial Intermediation and the Financial Crisis of 2007–2009,” Annual Review of Economics, forthcoming.

Aitken, James and Manmohan Singh (2009): “Deleveraging after Lehman—Evidence from Reduced Rehypothecation,” IMF Working Paper 09/42.

Armantier Olivier, Sandy Krieger and Jamie McAndrews (2008): “The Federal Reserve's Term Auction Facility,” Federal Reserve Bank of New York Current Issues in Economics and Finance 14(5).

Ashcraft, Adam B. (2005): “Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks,” American Economic Review 95(5).

Ashcraft, Adam B., and Til Schuermann (2007): “Understanding the Securitization of Subprime Mortgage Credit,” Foundations and Trends in Finance 2(3).

Ashcraft, Adam, Allan Malz, and Zoltan Pozsar (2010): “The Federal Reserve’s Term Asset-Backed Securities Loan Facility,” Federal Reserve Bank of New York Economic Policy Review, forthcoming. Bernanke, Ben S. (1983): "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review 73(3).

Brunnermeier, Markus (2009): “De-ciphering the credit crisis of 2007,” Journal Economic Perspectives 23(1): pp. 77–100.

Campbell, Sean and Daniel Covitz, William Nelson and Karen Pence (2011): “Securitization markets and central banking: an evaluation of the term asset-backed securities loan facility,” Journal of Monetary Economics 58(5), pp. 518-531.

Carey, Mark, Mitch Post, Steven A. Sharpe (1998) “Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting,” Journal of Finance 53(3), p. 845–878.

Corrigan, Gerald (2000): “Are Banks Special?—A Revisitation” The Region, Banking and Policy Issues Magazine, March 2000, the Federal Reserve Bank of Minneapolis

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Covitz, Daniel, Nellie Liang, and Gustavo Suarez (2009): “The Evolution of a Financial Crisis: Panic in the Asset-Backed Commercial Paper Market,” Board of Governors of the Federal Reserve System Finance and Economics Discussion Series 2009-36.

Coval, Joshua, Jakub Jurek, and Erik Stafford (2009): “The Economics of Structured Finance,” Journal of Economic Perspectives 23(1), pp. 3–25.

Diamond, Douglas and Philip Dybvig (1983): “Bank runs, deposit insurance, and liquidity,” Journal of Political Economy, pp. 401—419.

Eichner, Matthew, Donald Kohn and Michael Palumbo (2010): “Financial Statistics for the United States and the Crisis: What Did They Get Right, What Did They Miss, and How Should They Change?” Finance and Economics Discussion Series 2010-20.

Fleming, Michael, Warren Hrung, Frank Keane (2009): “The Term Securities Lending Facility: Origin, Design, and Effects,” Federal Reserve Bank of New York Current Issues of Economics and Finance 15(2).

Geanakoplos, John (2010): “The Leverage Cycle,” in NBER Macroeconomics Annual 2009, ed. Daron Acemoglu, Kenneth Rogoff, Michael Woodford. Chicago: Univ. Chicago Press.

Gertler, Mark and John Boyd (1993): “U.S. Commercial Banking: Trends, Cycles and Policy,” NBER Macroeconomics Annual, Olivier Blanchard and Stanley Fischer, editors, 1993.

Gorton, Gary (2009): “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007” Federal Reserve Bank of Atlanta Jekyll Island Conference Proceedings.

Martin, Antoine and David Skeie and Elu von Thadden (2011): “Repo runs,” FRB of New York Staff Report No. 444.

Merton, Robert C. (1977): “An Analytical Derivation of the Cost of Deposit Insurance and Loan Guarantees,” Journal of Banking and Finance 1, pp. 3-11.

Merton, Robert C. and Zvi Bodie (1993): “Deposit Insurance Reform: A Functional Approach,” Carnegie-Rochester Conference Series on Public Policy, 38 (1993) 1-34.

McCulley, Paul (2007): “Teton Reflections,” PIMCO Global Central Bank Focus

Morris, Stephen and Hyun Song Shin (2004): “Coordination risk and the price of debt,” European Economic Review 48(1), pp. 133—154.

Pozsar, Zoltan (2008): “The Rise and Fall of the Shadow Banking System,” Moody's Economy.com.

Pozsar, Zoltan (2010): “Institutional Cash Pools and the Triffin Dilemma of the US Banking System,” IMF Working Paper No. 11/190.

Wachter, Susan, Andrey Pavlov and Zoltan Pozsar (2008): “Subprime Lending and Real Estate Markets,” in Mortgage and Real Estate Finance, edited by Stefania Perrucci, Risk Books.

29

Appendix 1: The Government-Sponsored Shadow Banking System

CP

etc. CNs*

CPMTNs MTNs MTNsEquity Equity Equity

Equity Equity Equity


"Asset Flows"

The shadow credit intermediation process, and the shadow banking system were to a great extent insipred by the government sponsored enterprises, namely the FHLB system, Fannie Mae and Freddie Mac. The GSEs are creations of lawmakers and are off-balance sheet "shadow banks" of the U.S. Federal Government. The GSEs that make up the government-sponsored shadow banking system perform similar functions to term multi-seller conduits, credit risk repositories, and LPFCs and SIVs in the "private" shadow banking system. Thus, similar to multi-seller conduits, the FHLB system provides term loan warehousing for conforming mortgages (and other loans) to member commercial banks; similar to monoline insurers, Fannie Mae and Freddie Mac provide guarantees on the loans that back Agency MBS, turning them into credit risk-free rate products; and similar to SIVs or LPFCs, the GSE retained portfolios conduct maturity transformation on pools of mortgages and private-label term ABS. The credit intermediation process that goes through the government-sponsored shadow banking sub-system starts with commercial banks that originate conforming mortgages. These are either (1) funded with the FHLBs through maturity, or (2) are sold in the "TBA" market in order to be packaged into Agency MBS. As the loans pass through the TBA process, Fannie or Freddie provide guarantees on the loan pools, assuming the credit risk out of them. Some of the Agency MBS might end up being packaged into collateralized mortgage obligations (CMOs) which time-tranche the underlying cash-flows of mortgage pools. The short-dated tranches of CMOs are sold to 2(a)-7 MMMFs and other funds. Similarly, the GSE retained portfolios are funded through a mix of short-dated Agency discount notes (the GSE equivalent of private CP and ABCP) and Agency debt (the GSE equivalents of private MTNs and bonds) that are also sold to MMMFs and real money accounts, respectively.

Off

-Bala

nce

Shee

t

"Sha

dow

" V

ehicl

es/A

ctiv

ities

FHC

's C

redi

t Int

erm

edia

tion

Proc

ess

"Orig

inat

e-to

-Dis

trib

ute"

Single-Seller Conduit SIVs 2(a)-7 MMMFs(Loan Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")

HELs

...flow… ...stock!

ABCP

"AuM"(2A) Underwriting (TBA Market)

"IG" ABS

CP

$1 NAVABCP

AAA ABCDO

MTNsRepos

Confor-ming Loans

Confor-ming Loans

(3A) Distribution CMOs (Time Tranching)

Hol

ding

Com

pany

Su

bsid

iaries

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

Client FundsOther

ActivitiesOther

Activities

Flow… ...flow… ...flow…

HELs

Confor-ming Loans

Deposits Under-writing Repos

Under-writing Repos

The

GSE

-Bas

ed C

redi

t In

term

edia

tion

Pro

cess

"O

rigin

ate-

to-D

istr

ibut

e"

"Fed

eral"

Shad

ow B

anks

(1) Term

Warehousing

(3B) Distribution

(3C) Distibution

(4A) Funding

(4B) Funding

…flow… …flow… …stock!

(2B

) Cre

dit G

uata

ntee

s

ABS

FHLBSystem

Fannie MaeFreddie Mac

The GSE'sRetained Portfolios

Confor-ming Loans

Agency Discount

Notes and Debt

Agency Discount

Notes and Debt

Agency Discount

Notes and Debt

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









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

"Funding Flows"

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

30

Appendix 2: The Credit Intermediation Process of Bank Holding Companies

Appendix 3: The Credit Intermediation Process of Diversified Broker-Dealers

CP

etc. CNs*



FHC

's C

redi

t Int

erm

edia

tion

Proc

ess

"Orig

inat

e-to

-Dis

trib

ute"

Hol

ding

Com

pany

Su

bsid

iaries

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





ABS


ABS CDO

Under-writing

Commercial Bank Broker-Dealer Broker-Dealer

Flow… ...flow…


"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

"Sha

dow

" V

ehicl

es/A

ctiv

ities


Step 7Step 1


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


...flow…

"Asset Flows"

...flow…

CP

Equity etc.

MTNs MTNsEquity Equity Equity


Industrial Loan Company

Client FundsOther

ActivitiesOther

Activities


Under-writing Repos

Under-writing Repos

Finance Company Broker-Dealer Broker-Dealer(Loan Origination) (ABS Structuring/Syndication) (CDO Structuring & Syndication)

HELs

CP

MTNs

(Loan Warehousing) (ABS Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")

HELsBrokered Deposits

...flow… ...flow… ...stock!

"Mezz" HEL ABS

Tranches

Repos

"IG" ABS

$1 NAVBrokered DepositsAAA

ABCDO

Off

-Bala

nce

Shee

t

"Sha

dow

" V

ehicl

es/A

ctiv

ities

Repos

ReposB

roke

r-D

eale

r's C

redi

t Int

erm

edia

tion

Proc

ess

"Orig

inat

e-to

-Dis

trib

ute"

Trading Books Credit Hedge Funds 2(a)-7 MMMFs

"AuM"

Hol

ding

Com

pany

Su

bsid

iaries

The credit intermediation process of Diversified Broker-Dealers (DBD) is similar to that of FHC's (see Figure XX), with only a few differences. First, DBDs originate loans out of finance company subsidiaries, not commercial bank subsidiaries. Second, DBDs warehouse loans not in conduits, but in industrial loan company subsidiaries; alternatively, DBDs can outsource loan warehousing to an multi-seller conduit run by an FHC. Third, ABS warehousing is also not conducted from conduits, but from trading books. Finally, ABS intermediation is not conducted through SIVs, but through internal credit hedge funds. On a funding level, DBD's intermediation proceess is more reliant on brokered deposits and repo, compared to the FHC process, which is more reliant on branch deposits, CP and ABCP.

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


ABCP $1 NAV

"Asset Flows"

Step 7









"Funding Flows"

Loans Loans Loans ABS ABS ABS CDO ABCP

31

Appendix 4: The Independent Specialists-Based Credit Intermediation Process – Specialists Reliance on FHCs and DBDs as Gatekeepers to Capital Markets

CP

etc. CNs*

CPMTNs MTNsEquity Equity

Captive or Standalone

CP

etc. Equity etc. CNs*


(2A) Distribution

(2B

) Dis

trib

utio

n

The indepenent specialists-based credit intermediation process consists of entities like independent and captive finance companies on the loan origination side; limited purpose finance companies (LPFCs) and standalone SIVs and credit hedge funds on the ABS intermediation side; and LGIPS and non-bank affiliated MMMFs on the funding side. The independent specialists-based credit intermediation process is highly dependent on FHCs and DBDs as gatekeepers to capital markets and as underwriters of their securitization-based credit intermediation process. For example, starting from the bottom left balance sheet ("Captive or Standalone Finance Companies") and going to the right along the red line, finance companies rely on (1) FHC-affiliated multi-seller conduits for loan warehousing, (2) broker-dealers for the structuring and syndication of the ABS that funds their retained loans, which by definition are originate-to-fund securitizations (in contrast to FHCs' and DBDs' originate-to-distribute securitizations); (3) broker-dealers for the distribution of ABS to LPFCs (path 3A) and alternatively to SIVs (path 3B) that are affiliated with the FHC that owns the broker-dealer. Additionally, along the green line that begins from the balance sheet labeled "LPFCs", LPFCs rely on broker-dealers to underwrite their CP (as well as MTNs and capital notes) and (2) distribute them to FHC/DBD-affiliated MMMFs and LGIPS (paths 2A and 2B, respectively), as well as real money accounts, which are not depicted. Also note that the below figure do not depict the entire FHC process from Figure XX, only those parts of it that are relevant to the credit intermediation process of independent specialists.

(2) Underw

riting (3B) Distribution

(3A) Distribution

Stan

dalo

ne S

pecia

lists

(Off

-Bala

nce

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Noo

ne)

Inde

pend

ent S

peci

alis

ts'

C

redi

t Int

erm

edia

tion

proc

ess

"O

rigin

ate-

to-F

und"Finance Company LPFCs LGIPs

Client FundsOther

Activities

Flow… ...flow…

(1) W

areh

ousi

ng

(1) U

nder

writ

ing Hol

ding

Com

pany

Su

bsid

iaries

Commercial Bank

MTNsRepos

Flow… …stock!

(Shadow Bank "Deposits")Auto Loans

CP "IG" ABS

CP

$1 NAVABCP

"Niche" Loans

MTNs MTNs

(Loan Origination) (ABS Intermediation)

(Loan Origination) (ABS Structuring/Syndication)

HELs


"AuM"

MTNs

(4) Distribution

FHC

's C

redi

t Int

erm

edia

tion

Proc

ess

"Orig

inat

e-to

-Dis

trib

ute"

Multi-Seller Conduit SIVs 2(a)-7 MMMFs(Loan Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")

ABCP

"IG" ABS

Broker-Dealer

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-Bala

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Shee

t

"Sha

dow

" ,

V

ehicl

es/A

ctiv

ities

CP

$1 NAVABCP

AAA ABCDO Repos

...flow… ...stock!


"Asset Flows"








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



"Funding Flows"

HELs

Auto Loans

32

Appendix 5: The 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

-Bala

nce

Shee

t to

Noo

ne)

Inde

pend

ent S

peci

alis

ts' R

ole

in

FHC

s' a

nd D

BD

s'

C

redi

t Int

erm

edia

tion

Proc

ess

"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

Su

bsid

iaries


HELsClient FundsOther

ActivitiesOther

Activities



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

-Bala

nce

Shee

t

"Sha

dow

" V

ehicl

es/A

ctiv

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


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"









ABCP $1 NAV




33

Appendix 6: The Spectrum of Shadow Banks within a Spectrum of Shadow Credit Intermediation

CP CPMTNs ABCP

RRsA1

Equity Equity Equity CNs etc.O/C O/C

CP CPMTNs ABCP

RRsMTNs MTNs A1

Equity Equity* CNs Bonds CNs etc.O/C O/C

CPABCPRRsA1

Equity Equity Haircut Equity MTNsO/C O/C

ABCPRRs

AAA A2-A3AA-BBB

Equity Equity Haircut Equity HaircutO/C


Home Equity Loans

(DBD Sponsored)

2(a)-7 MMMFs(FHC Sponsored)

2(a)-7 MMMFs(Independent)

Enhanced Cash Fund(Independent)

Securities Lender(Insurance Co. Sponsored)

SIVs(FHC Sponsored)

Securities Arbitrage Conduit(Landesbank Sponsored)

Credit Hedge Fund

"Static" ABS CDO

SIV-Lite*

(Maturity Matched)"Revolving" ABS CDO

(Maturity Mismatched ABS CDO)

(Independent)

Repo/TRS Conduit(FHC Sponsored)

Multi-Seller Conduit(Independent)


(Independent)

Banks' Trading Books(...)

(Revolving Structures)

Wrapped Static Pools(Amortizing Structures)

ABCP

*Seller's interest

BBB Tranche in AAA "Wrap"

AAA to

BBB Tranches

DBDs Trading Books

ABCP Repo ABCP, repo CP, repo

Hybrid Conduit

AAA to

BBB Tranches

ABCP

AAA to

BBB Tranches

Bonds

(FHC Sponsored)

Credit Card Loans

ABCP

"Asset Flows"

Step 1 Step 2 Step 3 Step 4

Loans Loans Loans ABS ABS

Step 5 Step 6 Step 7









ABS CDO ABCP $1 NAV

ABCP, repo

ABS

LPFCs(Independent)

Standalone Finance Co.

"Funding Flows"

(Amortizing Structures) (Maturity Matched)Captive Finance Co.

(Investment Grade Parent)Single-Seller Conduit

Multi-Seller Conduit

Static Pools

Master Trusts

ABCP

MTNs

CP

Repos

Repos

Reverse Repos

Loans and ABS

Loans and ABS

Loans and ABS

BBB ABS

Tranches (static)

ABCP

ABS

Standalone Finance Co.

ABCP

ABCP

Various Loans

Various Loans

Auto Loans

Credit Card Loans

Subprime Auto Loans

(Monoline Lender)

(Diversified Lender)

("Junk" Parent)Captive Finance Co.

ABCP

ABS

ABS

Super Seniors

Collateral

Unfunded CDS

Protection

BBB ABS

Tranches (dynamic)

BBB ABS

Tranches (static)

*Market value structures

AAA to

BBB Tranches

ABCP

AAA to

BBB Tranches

Home Equity Loans

"HEL" RMBS

Bonds

Home Equity Loans

SLN

(Finance Company Sponsored)Synthetic ABS CDO

No Equity!

Personal and

Business Loans

Personal and

Business Loans

Personal and

Business Loans

Shadow banks are best thought along a spectrum. Each of the seven steps involved in the shadow credit intermediation process were performed by many different types of shadow banks, with varying asset mixes, funding strategies, amounts of capital and degrees of leverage. The list of balance sheets below are an illustrative example of this. Thus, the shadow credit intermediation process was supported by various forms of equity of various degrees of strength (each denoted with a red cell): as such, equity came in the form of common equity, overcollateralization (O/C), haircuts, equity tranches and capital notes. Wholesale funding providers (money market mutual funds, securities lenders) were the only actors involved in the shadow credit intermediation process without any form of capital supporting their activities. Having numerous types of shadow banks under each functional step of the shadow credit intermediation process means that each funcional step can be performed many different ways. Depending on the asset mix and funding strategy employed, different shadow banks performing the same functions in the system conducted different amounts of credit, maturiy and liquidity transformation. Shadow banks are listed vertically, top-down, in increasing order of riskiness.

ABS CDOs

ABS CDOs

ABCP

ABS

ABS CDOs

Repos

$1 NAVs

$1 NAVs

$1 NAVs

$1 NAVs

*Banks, finance cos., sovereigns

*Banks, finance cos., sovereigns

No Equity!

MTNs

No Equity!

No Equity!

ABCP

ABS

Bonds*

Increasingly riskyactivities due to greater am

ounts of credi and maturity transform

ation conducted

34

Appendix 7: The Pre-Crisis Backstop of the Shadow Credit Intermediation Process – The Case of FHCs

Equity Equity Equity Equity Equity

CP

etc. CNs*


Equity Equity Equity Equity Equity Equity


"Asset Flows"

Repos

Holding Company(Contingent Equity Call)

Subsi-diaries

Bonds

"IG" ABS

Step 6 Step 7

ABCP $1 NAV

"Funding Flows"


ABS Intermediation Wholesale Funding

Prior to the financial crisis, the credit intermediation process of the shadow banking system was privately enhanced. In this figure, we examine the enhancements to a typical FHC's credit intermediation process. Of the seven steps involved in the shadow credit intermediation process, only the first step (loan origination) is officially enhanced as it is conducted from a commercial bank. The commercial bank's activities are backstoped by credit and liquidity puts provided by the FDIC and the Federal Reserve through deposit insurance and discount window lending, respectively. The remaining six steps in an FHCs credit intermediation were privately enhanced, however. Consortiums of commercial banks were providing liquidity puts through contractual credit lines to conduits and SIVs (loan and ABS warehouses, and ABS intermediaries, respectively) and the tri-party clearing banks (JPMorgan Chase and BoNY) were providing intra-day credit to broker-dealers and daytime unwinds of overnight repos to MMMFs that fund them. Private credit risk repositories were making risky assets safe by "wrapping" them with credit puts. The loans, ABS, and CDOs wrapped by mortgage insurers, monoline insurers and AIG-FP, respectively, circulated in the system as credit-risk free assets that were used for collateral for funding via ABCP and repo. When the quality of these credit puts came into question, the value of collateral fell, ABCP could not be rolled, repo haircuts rose and the private liquidity puts were triggered. To provide the funding that has been agreed to via the liquidity puts, the funding providers (commercial banks) had to tap the unsecured interbank market, where the flood of bids for funding sent Libor spreads skyward.

Diversified Insurance Cos.

Deposit Insurance

Premium Reserves

Premium Reserves

Premium Reserves

Premium Reserves

Loan Insurance

Bond Insuance

Synthetic CDOs

Monoline InsurersFDIC(Official Credit Put) (Private Credit Put) (Private Credit Put) (Private Credit Put)

Mortgage Insurers


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

Hol

ding

Com

pany

Su

bsid

iaries

...stock!

Off

-Bala

nce

Shee

t

"Sha

dow

" V

ehicl

es/A

ctiv

ities

CP

$1 NAVABCP

AAA ABCDO

MTNs

"AuM"HELs

Federal Reserve(Official LoLR) (Private LoLR) (Private LoLR) (Private LoLR)(Private LoLR) (Private LoLR)

Commercial Banks

Discount Window

LoansOther Assets

Credit Lines

Intra-Day Credit

Other Assets

Credit Lines

Other Assets

Reserves

Other Assets

ABCP

"Mezz" HEL ABS

Tranches

ABCP

Credit Lines

Other Assets

Inter-Bank Loans

Inter-Bank Loans

Inter-Bank Loans

Inter-Bank Loans

Inter-Bank Loans

Intra-Day Credit

Commercial Banks Tri-Party Clearing Banks Commercial Banks Tri-Party Clearing Banks

Liq

uidi

ty P

utBroker-Dealer Broker-Dealer

(ABS Structuring/Syndication) (CDO Structuring & Syndication)

Other Assets

Client FundsOther

ActivitiesOther

Activities

...flow… ...flow…

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

...flow… ...flow…


Under-writing Repos

Flow…

Commercial Bank(Loan Origination)

Cre

dit P

ut

Cre

dit P

ut

Cre

dit P

ut

Cre

dit P

ut

Equ

ity C

all









Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance

Official Backstops Private Backstops

35

Appendix 8: The Post-Crisis Backstop of the Shadow Banking System

Equity Equity Equity Equity

Equity

CP

etc. CNs*

Equity


Equity

Equity Equity Equity Equity Equity Equity


Once private sector credit and liquidity put providers' ability to make good on their "promised" puts came into question, a run began on the shadow banking system. Central banks generally ignored the impairment of such important pillars of the shadow banking system as mortgage insurers or monoline insurers. Once the crisis gathered momentum, however, central banks became more engaged. The series of 13(3) liquidity facilities implemented by the Federal Reserve amd the guarantee schemes of other government agencies essentially amount to a 360º backstop of the shadow banking system. The 13(3) facilities can be interpreted as functional backstops of the shadow credit intermediation process. Thus, CPFF is a backstop of loan origination and warehousing; TALF is a backstop of ABS issuance; TSLF and Maiden Lane, LLC are backstops of the system's securities warehouses (broadly speaking); Maiden Lane III, LLC is a backstop of the credit puts sold by AIG-FP on ABS CDOs; TAF and FX swaps are backstops of and facilitated the orderly "on-boarding" of formerly off-balance sheet ABS intermediaries (many of them run by European banks who found it hard to swap FX for dollars); and finally, on the funding side, PDCF is a backstop of the tri-party repo system (a "platofrm" where MMMFs (and other funds) fund broker-dealers and large hedge-funds) and the AMLF, MMIFF and Maiden Lane II, LLC are backstops of various forms of regulated and undregulated money market intermediaries. Furthermore, the Treasury Department's Temporary Guarantee Program of MMMFs was an additional form of backstop for money market intermediaries. This program, together with the FDIC's TLGP can be considered moder-day equivalents of deposit insurance. Only a few types of entities were not backstopped by the crisis, and some attempts to fix problems might have exacerbated the crisis. Examples include not backstopping the monolines early on in the crisis (this might have tamed the destructiveness of deleveraging) and the failed M-LEC which ultimately led to a demarcation line between bank-affiliated and standalone ABS intermediaries (such as LPFCs or credit hedge funds) as recipients and non-recipients of official liquidity. These entities failed too early on in the crisis to benefit from the liquidity facilities rolled out in the wake of the bankruptcy of Lehman Brothers, and their demise may well have accelerated and deepened the crisis, while also necessitating the creation of TALF to offset the shrinkage in balance sheet capacity for ABS from their demise.








Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance

"Asset Flows"


ABS Intermediation Wholesale Funding

Cre

dit P

ut

Cre

dit P

ut

Cre

dit P

ut

Cre

dit P

ut

(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 P

ut

MTNsRepos


HELs ABCP

"Mezz" HEL ABS

Tranches

ABCP

"IG" ABS

CPABCP

AAA ABCDO

Under-writing Repos

"AuM"


HELs

Deposits Under-writing

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

CPFF


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

uidi

ty P

uts

Reserves

Client FundsOther

ActivitiesOther

Activities

Hol

ding

Com

pany

Su

bsid

iaries

(Shadow Bank "Deposits")

$1 NAV

Off

-Bala

nce

Shee

t

"Sha

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" V

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ctiv

ities

FHC

's C

redi

t Int

erm

edia

tion

Proc

ess

"Orig

inat

e-to

-Dis

trib

ute"

(FRBNY)(FRBNY) (FRBNY)

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

Liq

uidi

ty P

ut

PDCFTAF and FX SwapsTSLF and Maiden Lane, LLCTALF

Tri-Party Collateral

Repos


"Funding Flows"


Official Backstops Official Backstops

shadow banking - federal reserve bank of new york

Documents