Shadow Banking and Financial Instability

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					   Shadow Banking and
    Financial Instability

                Adair Turner
Chairman of the UK Financial Services Authority




            Cass Business School
              14th March 2012
Development of the crisis: 2007 – 2008

     June 2007: Bear Stearns hedge funds under liquidity pressure

  August 2007: Major losses by ‘market neutral’ hedge funds

 February 2008: Carlyle Capital and Peloton Hedge Funds closed
Autumn 2007 to
     Mid 2008: Liquidity and solvency problems at off-balance sheet SIVs

 Summer 2008: Stresses at MMMFs: Reserve Primary Fund ‘breaks the buck’
     August to
 October 2008: Liquidity run in repo and other secured funding markets

   Late autumn Hedge fund deleveraging and asset sales exacerbate
          2008:
                 downward spiral of asset values
                                                                           1
Estimates of size of ‘Shadow Banking’

        Pozsar, Adrian,
    Ashcraft and Boesky    US in March 2008:    $20tn
               (FRB NY)    US in 2010:          $16tn




      Pozsar and Singh     US at end 2007:      $25tn
       (December 2011)     US at end 2010:      $18tn



    Bouveret (July 2011)   Europe in March 2008: $13tn
                           Europe at end 2010: $13tn



     FSB (October 2011)    Global in 2002:       $27tn
                           Global in 2007:       $60tn
                           Global in 2010:       $60tn, of which
                                • US:            $24tn
                                • Europe:        $22tn
                                                                   2
Academic analysis of shadow banking:
Alternative / overlapping hypotheses

 Tobias Adrian Hyun    Secured finance plus mark-to-market accounting
               Shin    creates strong procyclicality


       Gary Gorton     Crisis of 2008 best understood as a “run on repo”
     Andrew Metrick

                       Shadow banking developments driven by increased
      Zoltan Pozsar
                       corporate and institutional demand for safe liquid assets.
   Manmohan Singh      Re-hypothecation of collateral increases the credit / near
                       money creation potential of shadow banking

Marcus Brunnermeier    “Funding liquidity”, “market liquidity” and asset
     Lesse Pedesen     values are linked in self-reinforcing cycles


    Nicola Gennaioli
                       Investor myopia central: many securities only
     Andrei Shleifer   existed because of neglected risks
      Robert Vishny
                                                                                3
                                    Financial Intermediation


Households                                                     Households




Non-financial
 Businesses



                                                               Non-financial
Governments
                                                                Businesses




Source: Financial Stability Board                                       4A
                                      Financial Intermediation


Households                                                                     Households


                              Loans                                 Deposits

Non-financial                                  Banks                           Non-financial
 Businesses
                                                                                Businesses



Governments


                                                             Maturity
                                                        transformation +
                                                            leverage

Source: Financial Stability Board

                                                                                       4B
                                                                                        5
                                           Financial Intermediation


Households                                                                     Households


                                                       Banks

Non-financial                                                                  Non-financial
                                                                               Non-financial
 Businesses                                                                     Businesses
                                                                                Businesses


                                           Insurance, Pension Funds +
Governments                                    other intermediaries


                                         Direct Investment: Bonds + Equities
        • Less maturity transformation
        • Less leverage


Source: Financial Stability Board
                                                                                        6
                                                                                       4C
                                    Financial Intermediation


Households                                                                         Households


                                                     Banks

Non-financial                                                                      Non-financial
 Businesses                                                                         Businesses


                                    Securitisation
                                        SPV


                                                      ABCP
Governments
Governments                                                         MMFs


                                    Hedge            Broker
                                    Fund             dealer

                                                              Maturity/liquidity
                                                              transformation
                                                                     +
                                                                 leverage
Source: Financial Stability Board                              … in multiple               4D
                                                                                            7
                                                                   steps
                                               Financial Intermediation


  Households                                                                               Households


                                                                Banks

  Non-financial                                                                            Non-financial
   Businesses                                                                               Businesses


                                               Securitisation
                                                   SPV


                                                                 ABCP
 Governments
 Governments                                                             MMFs


                                              Hedge             Broker
                                              Fund              dealer


                                    Interconnected via bank sponsorship, liquidity puts,
                                       repo markets, funding flows, securities lending
Source: Financial Stability Board                                                                    8
                                                                                                    4E
9
5
 US mortgages on bank balance sheets and securitised:
 1952 – 2009

   80%
                                            Mortgages outstanding as % of GDP
   70%

   60%
                                                                                                                                    BANK
   50%

   40%

   30%

   20%

   10%

    0%
         1952

                1955

                       1958

                              1961

                                     1964

                                             1967

                                                    1970

                                                           1973

                                                                  1976

                                                                         1979

                                                                                1982

                                                                                       1985

                                                                                              1988

                                                                                                     1991

                                                                                                            1994

                                                                                                                   1997

                                                                                                                          2000

                                                                                                                                 2003

                                                                                                                                        2006

                                                                                                                                               2009
                                              Private label RMBS issuers (home mortgage RMBS)
                                              Agency and GSE backed RMBS (home mortgages)
                                                     mortgages
                                              Home mortgages


Source: U.S. Flow of Funds
                                                                                                                                                       6
                                                                                                                                                      10
           Money market funds and bank deposits:
           US 1980-2010

               US Household holdings of money                                               US Non-Financial business holdings of
                       markets funds                                                               money markets funds

                 Percent of Household Cash and Liquid Deposits                                 Percent of Non-Financial Business Short-Term Assets

45%                                                                          85%   70%

40%                                                                          80%                                Checkable
                                                                                   60%                           Deposits
                                      Time & Saving Deposits
35%                                                                          75%
                                                                                   50%
30%                                                                          70%

25%                                                                          65%   40%

20%                                                                          60%
          Checkable Deposits                                                       30%

15%                                                                          55%                Time & Saving
                                                                                   20%             Deposits
10%                                                                          50%
                                                                                                                            MMMF
                             MMMF                                                  10%
5%                                                                           45%

0%                                                                           40%   0%
  1980           1985          1990      1995        2000      2005   2010           1980            1985            1990   1995   2000   2005        2010
  Source: US Flow of Funds
                                                                                     Source: US Flow of Funds




                                                                                                                                                  7
                                                                                                                                                 11
   Growth of assets in four financial sectors 1954 – 2006

     1954 Q1 = 1




Source: Brookings Papers on Economic Activity, 2010.         8
                                                            12
       US Asset-backed commercial paper 1990 – 2008

              900
              800
              700
              600
              500
        $bn




              400
              300
              200
              100
                0
                               Note: Not including ABCP of chartered banks
                     1990

                            1992

                                   1994

                                            1996

                                                    1998

                                                            2000

                                                                     2002

                                                                             2004

                                                                                    2006

                                                                                           2008
Source: US Flow of Funds              Note: Not including ABCP of chartered banks
                                                                                                   9
                                                                                                  13
    US Repo market 1990 – 2011
                                     US repo market ($ trillion)
         5.0
         4.5
         4.0
         3.5
         3.0
US $tn




         2.5
         2.0
         1.5
         1.0
         0.5
         0.0
           1990     1992    1994    1996    1998     2000   2002   2004   2006   2008   2010

                            Reverse Repo                                     Repo
         Note: US Primary Dealers only.
         Source: Federal Reserve Bank of New York.
                                                                                               10
                                                                                               14
       US financial sector assets as % of GDP

                       Banks                              MMMFs
                       GSE                                Agency and GSE- Mortgage Pools
                       Issuers of ABS                     Finance Companies
          300%         Security Broker-Dealer             Funding Corporation


          250%


          200%


          150%


          100%


            50%


             0%
               1960        1965   1970   1975   1980   1985   1990   1995   2000   2005    2010
Source: US Flow of Funds                                                                          11
                                                                                                  15
     USA debt as a % of GDP by borrower type



               300%

               250%                                                                                                  Corporate

               200%
                                                                                                                     Household
               150%

               100%
                                                                                                                     Financial
                 50%
                 10%




                                                                               1977
                                                                        1971


                                                                                      1983


                                                                                                    1996
                       1929


                                     1941
                                            1947



                                                          1959
                                                                 1965




                                                                                                           2002

                                                                                                                  2007
                              1935




                                                   1953




                                                                                             1990
Source: Oliver Wyman
                                                                                                                                 12
                                                                                                                                 16
Specific US drivers of shadow banking


 • US Residential mortgage market

 • Reg Q limits on bank deposit interest (in place till
   1986)

 • Erosion of Glass-Steagall: Gramm-Leach-Bliley
   Act: Light touch regulation of investment banks




                                                          13
                                                          17
        Residential mortgages – securitised versus on
        balance sheet
                          United Kingdom




                                                                        Non UK Europe




                                           Note: Non-UK Europe is defined as including Belgium, Denmark, Finland,
                                           France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain,
                                           Sweden
Source: Bank of America Merrill Lynch
                                                                                                       14
                                                                                                       18
    US and European Money Market Funds: 1997 – 2011


                   4000
                   4.0
                   3500
                   3.5
                   3000
                   3.0
                   2500
                   2.5
             $bn




                   2.0
                   2000

                   1.5
                   1500

                   1.0
                   1000
                   0.5
                    500

                       0
                           1997

                                  1998

                                         1999

                                                2000

                                                       2001

                                                              2002

                                                                     2003

                                                                            2004

                                                                                   2005

                                                                                          2006

                                                                                                 2007

                                                                                                        2008

                                                                                                               2009

                                                                                                                      2010

                                                                                                                             2011
                                           US Money Market Funds                   EU Money Market Funds



Source: Federal Reserve, ICI and EFAMA. The size of US MMFs in 2011 is at Q3 2011.                                                  15
                                                                                                                                    19
               Banking and other financial balance sheets: in US
               and Eurozone


              Deposit-taking Institutions as % of GDP                                                           Other financial institution as % of GDP


400%
                                                                                                  400%
                                                                              Euroarea                                                                                                 US
350%
                                                                                                  350%

300%                                                                                              300%

250%                                                                                              250%

200%                                                                                              200%
                                                                                                                                                                                            Euroarea
150%                                                                                              150%
                                                                                     US
100%                                                                                              100%

50%                                                                                               50%

 0%                                                                                                0%
       1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011          1999    2000   2001   2002   2003   2004   2005   2006   2007   2008   2009    2010    2011




   Source: IMF World Outlook Database, US Flow of Funds; ECB Statistical Data Warehouse
                                                                                                                                                                                       16
                                                                                                                                                                                       20
        Total expected losses in residential mortgage
        securities issued in US and Europe




Source: Fitch                                           17
                                                        21
           Mortgage arrears and write-offs in US, UK and Eurozone


                  Write-offs on secured household debt                                                  Arrears rate on residential mortgages
       3.0%                                                                           12.0%


       2.5%                                                                           10.0%


       2.0%                                                                               8.0%
Rate




       1.5%                                                                               6.0%


       1.0%                                                                               4.0%


       0.5%                                                                               2.0%


       0.0%                                                                               0.0%
           1993   1995   1997   1999   2001   2003     2005   2007    2009    2011               1982      1986       1990      1994       1998      2002       2006        2010



         UK -Secured (LHS)        US - Secured (LHS)          Euro area - Secured (LHS)                                  Arrears US                         Arrears UK
                                                                                                 Note: US arrears are past due thirty days or more and still accruing interest as
                                                                                                 well as those in nonaccrual status; UK arrears are more than 6 months in arrears




           Source: Bank of England, FSA calculations                                              Source: CML
                                                                                                                                                                       18
                                                                                                                                                                       22
    Securitisation volumes in US and UK markets:
    2005 – 2011                              UK RMBS issuance


            US issuance volumes                        UK issuance volumes
US $bn




                                                 €bn
                                  Home Equity
                                  Auto
                                  Credit Card
                                  CDO/CLO
                                  Student Loan
                                  Equipment
                                  Other




   Source: Societe Generale
                                                                             19
                                                                             23
   European securitisation issuance volumes
€ bn




 Source: J.P. Morgan European ABS & CB Research
                                                  20
                                                  24
 US and European ABCP outstanding



                                    US ABCP
                                    EMEA ABCP




Source: Moody’s Investors Service
                                                21
                                                25
   US Money Market Funds: size and asset composition

                 Taxable Prime MMMF Monthly Holdings                                      Taxable Government MMMF Monthly
                            2007-2011 ($bn)                                                    Holdings 2007-2011 ($bn)

2500000
    2,500                                                              1,600
                                                                       1,400
2000000
    2,000
                                                                       1,200
1500000
    1,500
                                                                       1,000
1000000
    1,000                                                                  800
 500000
     500                                                                   600
                                                                           400
      0
                                                                           200
          2007




                      2008



                                  2009




                                                2010




                                                            2011




                                                                             2007




                                                                                               2008




                                                                                                               2009




                                                                                                                            2010




                                                                                                                                            2011
            U.S. Government Agency Securities      Repurchase Agreements            US Treasury Bills                   Other Treasury Securities

            Certificates of Deposits               EuroDollar CD                    U.S. Government Agency Securities   Repurchase Agreements
                                                                                    Certificates of Deposits            EuroDollar CD
            Commercial Paper                       Bank Notes
                                                                                    Banker's Acceptances
            Corporate Notes                        Banker's Acceptances


       Source: ICI
                                                                                                                                                    22
                                                                                                                                                    26
Declining leverage of investment banks

                                                                                                             Quarterly Leverage ratio*
                                                                                                                                                                                                                                                                                                                                         x
                                                                                                                                                                                                                                                                                                                                     40

                                                                                                                                                                                                                                                    Bank of America Corporation                                                      35
                                                                                                                                                                                                                                                    Citigroup Inc.
                                                                                                                                                                                                                                                    JPMorgan Chase & Co.                                                             30

                                                                                                                                                                                                                                                    Lehman Brothers Holdings Inc.                                                    25
                                                                                                                                                                                                                                                    Morgan Stanley
                                                                                                                                                                                                                                                    Goldman Sachs Group, Inc.                                                        20

                                                                                                                                                                                                                                                                                                                                     15

                                                                                                                                                                                                                                                                                                                                     10

                                                                                                                                                                                                                                                                                                                                     5

                                                                                                                                                                                                                                                                                                                                     0
 2002Q4
          2003Q1
                   2003Q2
                            2003Q3
                                     2003Q4
                                              2004Q1
                                                       2004Q2
                                                                2004Q3
                                                                         2004Q4
                                                                                  2005Q1
                                                                                           2005Q2
                                                                                                    2005Q3
                                                                                                             2005Q4
                                                                                                                      2006Q1
                                                                                                                               2006Q2
                                                                                                                                        2006Q3
                                                                                                                                                 2006Q4
                                                                                                                                                          2007Q1
                                                                                                                                                                   2007Q2
                                                                                                                                                                            2007Q3
                                                                                                                                                                                     2007Q4
                                                                                                                                                                                              2008Q1
                                                                                                                                                                                                       2008Q2
                                                                                                                                                                                                                2008Q3
                                                                                                                                                                                                                         2008Q4
                                                                                                                                                                                                                                  2009Q1
                                                                                                                                                                                                                                           2009Q2
                                                                                                                                                                                                                                                    2009Q3
                                                                                                                                                                                                                                                             2009Q4
                                                                                                                                                                                                                                                                      2010Q1
                                                                                                                                                                                                                                                                               2010Q2
                                                                                                                                                                                                                                                                                        2010Q3
                                                                                                                                                                                                                                                                                                 2010Q4
                                                                                                                                                                                                                                                                                                          2011Q1
                                                                                                                                                                                                                                                                                                                   2011Q2
                                                                                                                                                                                                                                                                                                                            2011Q3
   Source: SNL,FSA calculations; * leverage defined as total assets /total equity                                                                                                                                                                                                                                                            23
                                                                                                                                                                                                                                                                                                                                             27
              Hedge fund assets under management and leverage

                      Estimated global A.U.M.                                                             Estimated leverage from prime broker
                                                                                                                         survey

$bn
                                                                                            2.0
                                                                                            1.9
2,000
                                                                                            1.8
                                                                                            1.7
1,500
                                                                                            1.6




                                                                                 Leverage
                                                                                            1.5
1,000                                                                                       1.4
                                                                                            1.3
 500                                                                                        1.2
                                                                                            1.1
                                                                                            1.0
   0
        1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011                Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct-
                                                                                                   05   05   06   06   07   07   08   08   09   09   10   10   11   11

                                                                                                                             HFACS: LMV % of NAV
                                                                                                                             (LMV: Long Market Value)



         Source: Barclays Hedge Database                                                             Source: FSA Hedge Fund as Counterparty Survey


                                                                                                                                                              24
                                                                                                                                                              28
Five drivers of instability in modern financial systems


• Secured lending, mark-to-market accounting and
  resulting procyclicality

• Long complex intermediation chains: non-transparent
  maturity transformation

• Funding liquidity driving market liquidity in traded
  markets

• Increasing demand for safe liquid assets

• Unstable and myopic risk assessment
                                                          25
                                                          29
Bank credit and money creation


                     Asset   Liability


     Loan to non-     100    100     Deposit from
financial business                   non-financial
                                     business




Not immediately repayable            Immediately available “private money”




                                                                         26
                                                                         30
Credit and asset price cycles

                          Increased credit
                             extended




                        Increased
Increased lender                                                 Increased asset
                    borrower demand
 supply of credit                                                     prices
                         for credit


                                     Expectation of
                                   future asset price
                                       increases

     Favourable
   assessments of
     credit risk
                                      Low credit losses: high
                                      bank profits
                                      • Confidence reinforced
                                      • Increased capital base
                                                                                   27
                                                                                   31
Bank credit and creation of unsecured private money



                     Asset   Liability

           Loan       100    100         Deposit


         May be                          Not secured
         secured




                                                       28
                                                       32
Shadow bank credit and creation of secured
private money



                                                     Money
             Hedge               Broker
Borrower                         Dealer
                                                     Market   Investor
             Fund         Repo /              Repo   Fund
                      Prime broker
                         finance




                     Secured money        Secured money
                       equivalent           equivalent




                                                                  29
                                                                  33
Hardwired procyclicality in secured funding
contracts


         Asset value
            falls



                             • More collateral required
                               even if % haircuts/margins
                               unchanged
                             • Variation margin paid



    • Assets sold to cover                                  Increased risk
      margin calls                                       awareness
    • Reduced funding                                   Increased % haircuts
      available



                                                                           30
                                                                           34
                                                    Heighten procyclicality in secured funding based
                                                    system

                                                    Total assets and leverage of commercial                                                                                    Total assets and leverage of security
                                                                     banks                                                                                                             brokers and dealers

                                         6                                                                                                                      40
                                                                                                                                                                                                                                                          1982Q4
Total Asset Growth (Percent Quarterly)




                                                                                                                       Total Asset Growth (Percent Quarterly)
                                         5
                                                                                                                                                                30
                                                                                                                                                                                                                                                                    1984Q4

                                         4
                                                                                                                                                                20
                                                                                                                                                                                                                                       2000Q1
                                         3
                                                                                                                                                                10
                                         2
                                                                                                                                                                 0
                                         1
                                                                                                                                                                                                                          1998Q4
                                                                                                                                                                -10
                                         0
                                                                                                                                                                                              1987Q4
                                                                                                                                                                            1965Q3
                                         -1                                                                                                                     -20
                                                                                                                                                                                     1973Q1
                                                                                                                                                                                                1974Q1
                                         -2                                                                                                                     -30
                                              -50     -40   -30   -20     -10     0      10      20     30   40   50                                                  -50        -40           -30         -20      -10            0            10   20        30            40
                                                                  Leverage Growth (Percent Quarterly)                                                                                                    Leverage Growth (Percent Quarterly)




   Source: Tobias Adrian and Hyun Song Shin, “Liquidity and Leverage”, FRSNY Staff Report, 2009
                                                                                                                                                                                                                                                              31
                                                                                                                                                                                                                                                              35
          Average repo haircuts: US bilateral repo market
          2007 – 2009
                  50.0%


                  45.0%

                  40.0%


                  35.0%

                  30.0%


                  25.0%


                  20.0%

                  15.0%


                  10.0%

                   5.0%


                   0.0%
                          01/01/07



                                     01/04/07



                                                01/07/07



                                                           01/10/07



                                                                      01/01/08



                                                                                 01/04/08



                                                                                            01/07/08



                                                                                                       01/10/08



                                                                                                                  01/01/09
Source: Gary Gorton and Andrew Metrick, “Shadow banking and the run on repo, 2009                                            32
                                                                                                                             36
Maturity transformation in banks and shadow banks

                                  BANK

        Long-term                                Instant access /
          loans                                     short-term
                                                     deposits




                        SHADOW BANK CHAIN


 Long-term               ABCP                           Instant access
   loans                 SIV /             MMF            “deposits”
                        Conduit


                Hedge             Broker
                Fund              dealer

                                                                         33
                                                                         37
Funding liquidity and market liquidity


                         Asset value
                            falls                              Reduced funding
                                                                   liquidity


                                                 More collateral
• Increased volatility
                                                 needed or less
• Increased measured                            funding available
  risk and capital
  requirement


                            Reduced trader
                                activity




                                       Reduced market
                                          liquidity
                                                                          34
                                                                          38
        Household deposits and loans: 1964 – 2009

                      100%

                      90%            Securitisations and loan transfers   Deposits   Loans
                      80%

                      70%

                      60%
           % of GDP




                      50%

                      40%

                      30%

                      20%

                      10%

                       0%
                         1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009



Source: Bank of England, Tables A4.3, A4.1                                                                 35
                                                                                                           39
         Non-Financial corporations' cash and cash
         equivalents




Source: Zoltan Pozsar, Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System, IMF Working Paper 11/190
                                                                                                                               36
                                                                                                                               40
The Secular Rise of Institutional Cash Pools




                                               37
                                               41
Securities lenders' holdings of cash and cash
equivalents




                                                38
                                                42
Real return on US treasury 20 year index-linked
bond, 1999 – 2012

  5%



  4%



  3%



  2%



  1%



  0%
    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



                                                                            39
                                                                            43
“Credit derivatives enhance the transparency of
the market’s collective view of credit risks … [and
thus] … provide valuable information about credit
conditions and increasingly set the marginal price
of credit”
               IMF Global Financial Stability Review
                                           April 2006




                                                        40
                                                        44
         Financial firms’ CDS and share prices
                                                        Exhibit 1.27: Composite Time Series of Select Financial Firms' CDS and share prices
                                     1.2%                                                                                                                                                                               2.50
     Average CDS Spread in Percent




                                     1.0%
                                                                                                                                                                                                                        2.00




                                                                                                                                                                                                                               MarketCap Index
                                     0.8%
                                                                                                                                                                                                                        1.50

                                     0.6%

                                                                                                                                                                                                                        1.00
                                     0.4%


                                                                                                                                                                                                                        0.50
                                     0.2%


                                     0.0%                                                                                                                                                                               -
                                            Dec 02




                                                                       Dec 03




                                                                                                  Dec 04




                                                                                                                              Dec 05




                                                                                                                                                         Dec 06




                                                                                                                                                                                    Dec 07




                                                                                                                                                                                                               Dec 08
                                                              Aug 03




                                                                                         Aug 04




                                                                                                                     Aug 05




                                                                                                                                                Aug 06




                                                                                                                                                                           Aug 07




                                                                                                                                                                                                      Aug 08
                                                     Apr 03




                                                                                Apr 04




                                                                                                            Apr 05




                                                                                                                                       Apr 06




                                                                                                                                                                  Apr 07




                                                                                                                                                                                             Apr 08
                                                                                                           CDS            SHARE-PRICE-ADJUSTED

                                                                                                                 Firms included: Ambac, Aviva, Banco Santander, Barclays, Berkshire Hathaway,
                                                                                                                 Bradford & Bingley, Citigroup, Deutsche Bank, Fortis, HBOS, Lehman Brothers, Merrill
                                                                                                                 Lynch, Morgan Stanley, National Australia Bank, Royal Bank of Scotland and UBS.
                                                                                                                 CDS series peaks at 6.54% in September 2008.
Source: Moody’s KMV, FSA Calculations
                                                                                                                                                                                                                                                 41
                                                                                                                                                                                                                                                 45
Three questions


• How much non-bank credit intermediation desirable?

• Isolate banking from shadow banking, or regulate shadow
  banking?

• How to offset the procyclicality of secured finance and
  mark-to-market?




                                                            42
                                                            46
Five workstreams

1. Bank links to shadow banking
       •   Capital
       •   Liquidity
       •   Consolidation

2. Money market funds

3. Securitisation

4. Other shadow banking entities

5. Secured finance markets: Repo and securities lending


                                                          43
                                                          47
                                                Simplified market overview
               Finance                                                             bilateral repo                                                     Commercial
           Companies and
                                                                                                                                                        Banks
         Structured Vehicles

             Cash and
                                                                                                   Tri-party                                         Money Market
            Derivatives
                                                                                                    Agent               tri-party repo                  Funds
              Trader

                                         CCP investing margin
              Dealer                        cash in repo
                                                                                                                                                     Other Institutions

                                                                                                cash collateral reinvested in repo

                                                        CCP
                    centrally cleared repo
                                                                                                               Other Cash Collateral
                                                                                                                  Reinvestment
                                                                                                                     Vehicles




                                                                                                                                                                            cash collateral reinvestment
                          bilateral repo
                             repo financing                                          collateral swaps
                                                              Dealer                     (Europe)
                                                                                                               Beneficial Owners


           Leveraged            securities lending
        Investment Fund
                                                         Prime Broker
                                   and financing

                                                             Cash and
                                                            Derivatives                                                                             Agent Lender
                                                              Trader                                       securities lending
Note:
1.      This diagram is intended to provide a general picture of the market only. Actual practices may differ across jurisdictions.
2.      Beneficial Owners in the securities lending segment may include pension funds, insurance companies and investment funds.
3.      Other Cash Collateral Reinvestment Vehicles in the securities lending segment may include commingled pools, separate accounts and other financial instruments.
4.      Other Institutions in the repo financing segment may include pension funds, insurance companies and corporations.
5.      The arrows in the diagram point to entities that typically post margins/haircuts, and the blue boxes represent entities that are usually part of a banking group.                   44
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Key recommendation for understanding shadow
banking




         “We recommend printing the accompanying
         map of the shadow banking system as a 36”
         and 48” poster”
                       Pozsar, Adrian, Ashcraft and Boesky
                                                July 2010




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