shadow banking final.pptx
TRANSCRIPT
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Seminar on
MANAGEMENT OF BANKING AND
FINANCIAL SERVICES
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TODAYS AGENDA
17/7/2013
1
SHADOW BANKS:Introduction to it.
2 SHADOW BANKS:
Prime cause for 2007 crisis.
3 SHADOW BANKING:The Chinese scenario.
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Shadow bank vs. Normal
bank
Access No access to central bank funds
Safety
No Safety nets from FDIC((FederalDeposit Insurance Corporation)
Trading Banks do not take deposits instead
rely on asset backed C.P and CDOs
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SHADOW BANKING
SYSTEM:
VOLUME:
Year Size of SBS (FSB)
2007 - $25 Trillion2011 - $24 Trillion
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Five steps of shadow banking
1. Make loans.2. Make securities.
3. Sell securities.
4. Set up (SPVs)5. Trade (CDOs)
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Mortgaged Backed Securities -MBS
Secured by a mortgage(asset)
Lent to home buyers.
Default of the loan leads to surrenderof the asset.
Given by small regional banks.
Middlemen's job
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Collateralized debt obligations - CDO
Backed by a pool of bonds, loans.An investment-grade security,
Do not specialize in one type of debt
Often mortgage loans
Different types of debt are often referred to
as 'tranches' or 'slices
PRIME
NON PRIME
SUBPRIME
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Commercial PapersCPs
A short-term investment vehicle
With a maturity (90 and 180 days.)
Issued by a bank and Companies.
Used for short-term financing needs.
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Shadow BankersAsset management
firms
Bank holding
companies Banks, investment
Banks, traditional
Hedge funds Insurance
companies
Private equity firms
Securitizing firms
Sovereign wealth
funds
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3 Stage destruction and
turmoil
C.PS
CDOS
MBSS
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IN THE 70S
In 1970 banks were just doing Vanillabanking.
Corporate went for C.Ps (started by Coke andGE)
Banks had protection form FDIC (FederalDeposit Insurance Corporation)
C.Ps :1. Short term
2. Risky (comparatively)
3. Not protected
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THE STARTCITIGROUP
Known for products with heavy risk
hate to lose investors wanted a safe play:-(only high rated quality assets).
Need was to create a new place ofinvestment vehicle.
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NICK SOSSIDISPARTIDGE HICKS
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Android of Citi called the ALPHA
(The 1st so called shadow bank ever)
Not banks, early forms of SPV.
FUNCTIONS
1. Trade in only high rated bonds(strictly)2. Raise the money though Short term C.Ps.
3. Chances of failing = ZERO
Umbilical cord with citi ( Back stop
facility) 17/7/2013
C.PS High ratedbonds
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GET SET GO!!!
IKB Deutshe Industrial bank Formed a new android called the
RHINELAND.
Similar to alpha but much more risky
(next shadow product)
New rules of Umbilical cord
High risk Better fee Constantdemand 17/7/2013
C.PS CDOS
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GORDIAN KNOT
Introduction of SIGMA. (yet another shadowproduct)
IOSS maturing @ longer years (reducerisk of payment)
Same as Alpha but didnt have theumbilical cord!
Medium term notes (MTN)..LONGERMATURITY.
The thing was growing @ million
dollar pace.
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Analysts team of Moddy quit to form aSIV.
Moddy was analyzing the sigmas that
time. Patenting a financial innovation:
difficult
Sigma clones spread like forest fire. $3 Trillion of IOUs were soldfor
highhy risky and subprime CDO.
Shadow banking @ its height!17/7/2013
Thieves steal to gain!
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Banks become BLACK!
Banks wanted higher returns.
To grow faster, take high risk
Banks set up shadow institutions.
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MorganStanley Cheyne
Barclaysbank AVENDIS
And many more likethis
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Unlike sigma they were taking huge
risks
Paradoxthese were sold to hate tolose investors
Investors never knew the CDOs (bad)
behind the IOUs. Japanese weren't ready so the their
scapegoat were The liquidity flushed
MIDDILE EAST NATIONS. The giant CDOs were managed by
the HEDGE FUND.
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The turmoil begins
The shadow bankers wrongassumptions:
The housing prices will always sore-
NO
The default loans will not effect the giant CDOs
NO
Buying the rating companies will always ensure
constant demand for shadow products
THAT DIG THEIR GARVE.
The turmoil began..slowly
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The stage 1, the loans turned bad.
The MBS lost all its market value.
The stage 11, the CDO s lost all itsvalue and no inflow of cash. Therewere millions of unsold CDOs (likerotten onions)
The stage 111, the C.Ps
Matured and the lack of liquidityMade them sell more CDOs for
Loss and the Shadow institutions
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MBSS
CDOS
C.PS
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Sizeable informal financial sector.
Financial intermediaries not registered
Include informal lenders, kerbside capitalists, back-
alley bankers.
Wealth management products offered by
regulated banks and trusts.
Provide credit outside traditional, and more highlyregulated, banking model.
In violation of Chinese law.
Careless local governments .
THE BROAD OUTLOOK
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1. The local governments borrowing behavior.
2. Structure of banking industry.
3. Underdevelopment of the corporate bond
market.
4. IPO regulatory frame work.
5. Negative real deposit rates, due to high
inflation.
Reasons for emergence of shadow banking.
Part 1: THE CreditKulaks.
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According to Xiao Gang, The Chairman of, The Bank of
China.
Area of wealth management products is especially
concerning.
Estimates
20% of total bank assets.
33% increase since 2010.
Yields reaching 70%!
Scale of shadow banking
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17/7/2013
Not really.
It is well diversified and serves a legitimate consumer
base.
Have much lower leverage than the banks or other
Corporate China.
Losses often absorbed by the entrepreneurs
themselves.
They help those in financial repression.
Is this form of shadow banking really bad?
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Wealth management products.An alternative to a bog-standard bank deposit.Peoples Bank of China, deposit interest rates 3.5%WMP 5% to Above 8%(www.euromoney.com)
WMPs to be over 20,000,
Total value of WMPs to be 12.14 trillion RMD by 2012.Characterized this shadow banking sector as a potentialsource of systemic financial risk, whose model isfundamentally a Ponzi scheme.
The shadow banking. Part ll
WMP
BY BANKSBY
TRUSTS
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Comparable to CDOs.
The Global Financial Crises.
The nature of Chinese economy.-export oriented.
-Low cost of labour and HUKOU.
-Interest in infrastructure.
The Economic stimulus.
How it started?
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Fuelling of Speculative housing bubble.
Inefficient State owned enterprises.
Sunk investments into LGFVs.
Post Reducing stimulus.
The rise of WMVs.
Impact of Economic Stimulus.
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AN HUMBLE OFFERING AT HIS DIVINE LOTUS FEET
SAIRAM