How did Too Big to Fail become such a problem for broker-dealers?

Speculation by Andy Atkeson March 2014 Proximate Cause

• By 2008, Broker Dealers had big balance sheets

• Historical experience with rapid contraction of broker dealer balance sheets and bank runs raised unpleasant memories for central bankers

• No satisfactory legal or administrative procedure for “resolving” failed broker dealers

• So the Fed wrestled with the question of whether broker dealers were too big to fail Why do Central Bankers care?

• Historically, deposit taking “Banks” held three main assets

• Non-financial commercial paper

• Government securities

• Demandable collateralized loans to broker-dealers

• Much like money market mutual funds (MMMF’s) today

• Many historical (pre-Fed) banking crises (runs) associated with sharp changes in the volume and interest rates on loans to broker dealers

• Similar to what happened with MMMF’s after Lehman?

• Much discussion of directions for central bank policy and regulation

• New York Clearing House 1873

• National Monetary Commission 1910

• Pecora Hearings 1933

• Friedman and Schwartz 1963 Questions I want to consider

• How would you fit Broker Dealers into the growth model?

• What economic function do they perform in facilitating trade of securities and financing margin and short positions in securities?

• What would such a theory say about the size of broker dealer value added and balance sheets?

• What would be lost (socially) if we dramatically reduced broker dealer balance sheets by regulation?

• Are broker-dealer liabilities the “right” asset for “banks” to hold?

• Chari-Phelan/Farhi-Golosov-Tsyvinski/Jacklin on tradable assets in Diamond Dybvig Example: how do we put real estate brokers into the growth model?

• Households have a motivation to trade houses

• Real Estate Broker adds value in facilitating transaction

• Measured in NIPA as broker’s commissions as part of residential investment

• Real estate brokers typically do not provide financing of transactions so they have small balance sheets

• Real Estate Developers do need to finance new construction (typically with bank loans) RealRICompQ32013.jpg 1,066× 760Estate pixels Brokers in NIPA3/28/14, 7:20 AM

http://1.bp.blogspot.com/-jMk790p2xu4/Un-9FI61bNI/AAAAAAAAc1s/mQvIra4AT4U/s1600/RICompQ32013.jpg Page 1 of 1 Securities Broker Dealers vs. Real Estate Brokers

• Traditional Investment Banking (underwriting and mergers and acquisitions)

• Brokerage commissions and fees

• Dealers bid-ask spreads Value Added of Securities, Commodities Contracts, and Investments industry as a percentage of GDP

1.8#

1.6#

1.4#

1.2#

1.0#

0.8#

0.6#

0.4#

0.2#

0.0#

1997# 1998# 1999# 2000# 2001# 2002# 2003# 2004# 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# Facts to be presented today

• Since the founding of the Fed, most of the time, securities broker dealers have small balance sheets

• Two episodes of big increase and decrease in the size of the balance sheet of broker dealers

• the past 20 years

• Crash of 1929 Outline of the talk

• Structure of a modern big bank (Citibank and Goldman Sachs)

• Growth of balance sheets of Securities Broker Dealers (Flow of Funds 1952-now)

• A look at a broker dealer’s balance sheet by function (What does a broker-dealer do?)

• Comparison to data on broker dealer balance sheets, funding sources, and failures from 1918 - 1941 including the Crash of 1929 What do big banks do these days?

• Holding Company

• Traditional Retail Banking

• Traditional Investment Banking

• Asset Management

• Securities Brokering and Dealing 11/28/13, 2:35 PM

As describedWhat above, Citigroup is manageddoes pursuant to the followinga segments:Big Bank do?

The following are the four regions in which Citigroup operates. The regional results are fully reflected in the segment results above.

(1) North America includes the U.S., Canada and Puerto Rico, Latin America includes Mexico, and Asia includes Japan.

5

http://www.sec.gov/Archives/edgar/data/831001/000120677413000852/citigroup_10k.htm Page 8 of 483 11/28/13, 2:35 PM

As describedTraditional above, Citigroup is managed pursuant to the followingRetail segments: Banking

The following are the four regions in which Citigroup operates. The regional results are fully reflected in the segment results above.

(1) North America includes the U.S., Canada and Puerto Rico, Latin America includes Mexico, and Asia includes Japan.

5

http://www.sec.gov/Archives/edgar/data/831001/000120677413000852/citigroup_10k.htm Page 8 of 483 11/28/13, 2:35 PM

As describedSecurities above, Citigroup is managed pursuant Brokering to the following segments: and Dealing

The following are the four regions in which Citigroup operates. The regional results are fully reflected in the segment results above.

(1) North America includes the U.S., Canada and Puerto Rico, Latin America includes Mexico, and Asia includes Japan.

5

http://www.sec.gov/Archives/edgar/data/831001/000120677413000852/citigroup_10k.htm Page 8 of 483 Form 10-K 2/8/14, 5:18 PM

Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

PART I Item 1. Business

Introduction As of December 2012, we had offices in over 30 countries and 49% of our total staff was based outside the Americas (which includes Goldman Sachs is a leading global investment banking, securities the countries in North and South America). Our clients are located and investment management firm that provides a wide range of worldwide, and we are an active participant in financial markets financial services to a substantial and diversified client base that around the world. In 2012, we generated 41% of our net revenues includes corporations, financial institutions, governments and high- outside the Americas. For more information on our geographic net-worth individuals. results, see Note 25 to the consolidated financial statements in When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” Part II, Item 8 of this Form 10-K. and “our,” we mean The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, and its consolidated subsidiaries. References to “this Form 10-K” are to our Annual Report on Our Business Segments and Segment Form 10-K for the year ended December 31, 2012. All references Operating Results to 2012, 2011 and 2010 refer to our years ended, or the dates, as the We report our activities in four business segments: Investment context requires, December 31, 2012, December 31, 2011 and Banking, Institutional Client Services, Investing & Lending and December 31, 2010, respectively. Investment Management. The chart below presents our four Group Inc. is a bank holding company and a financial holding business segments. company regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Our U.S. depository institution subsidiary, Goldman Sachs Bank USA (GS Bank USA), is a New York State-chartered bank.And Goldman Sachs

http://www.sec.gov/Archives/edgar/data/886982/000119312513085474/d446679d10k.htm Page 4 of 280 Form 10-K 2/8/14, 5:18 PM

Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

PART I Item 1. Business

Introduction As of December 2012, we had offices in over 30 countries and 49% of our total staff was based outside the Americas (which includes Goldman Sachs is a leading global investment banking, securities the countries in North and South America). Our clients are located and investment management firm that provides a wide range of worldwide, and we are an active participant in financial markets financial services to a substantial and diversified client base that around the world. In 2012, we generated 41% of our net revenues includes corporations, financial institutions, governments and high- outside the Americas. For more information on our geographic net-worth individuals. results, see Note 25 to the consolidated financial statements in When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” Part II, Item 8 of this Form 10-K. and “our,” we mean The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, and its consolidated subsidiaries. References to “this Form 10-K” are to our Annual Report on Our Business Segments and Segment Form 10-K for the year ended December 31, 2012. All references Operating Results to 2012, 2011 and 2010 refer to our years ended, or the dates, as the We report our activities in four business segments: Investment context requires, December 31, 2012, December 31, 2011 and Banking, Institutional Client Services, Investing & Lending and December 31, 2010, respectively. Investment Management. The chart below presents our four Group Inc. is a bank holding company and a financial holding business segments. company regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Our U.S. depository institution subsidiary, GoldmanTraditional Sachs Bank USA (GS Bank USA), I-Banking is a New York State-chartered bank.

http://www.sec.gov/Archives/edgar/data/886982/000119312513085474/d446679d10k.htm Page 4 of 280 Form 10-K 2/8/14, 5:18 PM

Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

PART I Item 1. Business

Introduction As of December 2012, we had offices in over 30 countries and 49% of our total staff was based outside the Americas (which includes Goldman Sachs is a leading global investment banking, securities the countries in North and South America). Our clients are located and investment management firm that provides a wide range of worldwide, and we are an active participant in financial markets financial services to a substantial and diversified client base that around the world. In 2012, we generated 41% of our net revenues includes corporations, financial institutions, governments and high- outside the Americas. For more information on our geographic net-worth individuals. results, see Note 25 to the consolidated financial statements in When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” Part II, Item 8 of this Form 10-K. and “our,” we mean The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, and its consolidated subsidiaries. References to “this Form 10-K” are to our Annual Report on Our Business Segments and Segment Form 10-K for the year ended December 31, 2012. All references Operating Results to 2012, 2011 and 2010 refer to our years ended, or the dates, as the We report our activities in four business segments: Investment context requires, December 31, 2012, December 31, 2011 and Banking, Institutional Client Services, Investing & Lending and December 31, 2010, respectively. Investment Management. The chart below presents our four Group Inc. is a bank holding company and a financial holding business segments. company regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Our U.S. depository institution subsidiary, GoldmanAsset Sachs Bank USA (GS BankManagement USA), is a New York State-chartered bank.

http://www.sec.gov/Archives/edgar/data/886982/000119312513085474/d446679d10k.htm Page 4 of 280 Form 10-K 2/8/14, 5:18 PM

Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

PART I Item 1. Business

Introduction As of December 2012, we had offices in over 30 countries and 49% of our total staff was based outside the Americas (which includes Goldman Sachs is a leading global investment banking, securities the countries in North and South America). Our clients are located and investment management firm that provides a wide range of worldwide, and we are an active participant in financial markets financial services to a substantial and diversified client base that around the world. In 2012, we generated 41% of our net revenues includes corporations, financial institutions, governments and high- outside the Americas. For more information on our geographic net-worth individuals. results, see Note 25 to the consolidated financial statements in When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” Part II, Item 8 of this Form 10-K. and “our,” we mean The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, and its consolidated subsidiaries. References to “this Form 10-K” are to our Annual Report on Our Business Segments and Segment Form 10-K for the year ended December 31, 2012. All references Operating Results to 2012, 2011 and 2010 refer to our years ended, or the dates, as the We report our activities in four business segments: Investment context requires, December 31, 2012, December 31, 2011 and Banking, Institutional Client Services, Investing & Lending and December 31, 2010, respectively. Investment Management. The chart below presents our four Group Inc. is a bank holding company and a financial holding business segments. company regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Our U.S. depository institution subsidiary,Securities Goldman Sachs Bank USA Brokering (GS Bank USA), and Dealing is a New York State-chartered bank.

http://www.sec.gov/Archives/edgar/data/886982/000119312513085474/d446679d10k.htm Page 4 of 280 How has the scale of these businesses changes since 1952

• A look at balance sheets in the Flow of Funds The growth of balance sheets in Securities B-D

Securi'es)B+D)Assets/GDP)(L)128)) 25%#

20%#

15%#

10%#

5%#

0%# Jul*58# Jul*77# Jul*96# Jan*68# Jan*87# Jan*06# Sep*80# Sep*99# Sep*61# Nov*64# Nov*83# Nov*02# Mar*52# Mar*90# Mar*09# Mar*71# May*55# May*93# May*12# May*74# Traditional I-Banking did not need a balance sheet

Securi'es)B+D)Assets/GDP)(L)128)) 25%#

20%#

15%#

10%#

5%#

0%# Jul*58# Jul*77# Jul*96# Jan*68# Jan*87# Jan*06# Sep*80# Sep*99# Sep*61# Nov*64# Nov*83# Nov*02# Mar*52# Mar*90# Mar*09# Mar*71# May*55# May*93# May*12# May*74# Summary of Broker Dealer Balance Sheet

Table 1
Table 2
4UZMJ[FE
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Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables

t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to other forms of collateralized lending, such as brokerage balance sheet to illuminate those dealer-bank-specifc and customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet the securities purchased is greater than the cash outlay, with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5 Table 1
Table 2
4UZMJ[FE
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4IFFU 4UZMJ[FE
$PMMBUFSBM
3FDPSE

Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables

t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instrumentsTable 1
owned will refect the fair value of Table 2
the dealer bank takes the opposing side of the trade. 4UZMJ[FE
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4IFFU 4UZMJ[FE
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Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative Assets Liabilities and Equity Collateral Receivedcurities lending, butCollateral are Repledgedgenerally related to other collater- contracts. In concept, the fair value refects the cash that Cash Equity alized— borrowings, such— as brokerage customer credit bal- could be obtainedInstruments ownedupon sale of theInstruments instrument. sold but not yet owned ances— and collateral received— in connection with derivative Reverse repo/securities borrowing Repo/securities lending t
Reverse repurchaseBrokerage receivables agreements (reverseBrokerage repo)/securities payables borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is t
Brokerageof receivablesthe net economicare economically claims similar on to reverseand obligations of the dealer recorded on the balance sheet as the value of the cash outlay, repos/securities borrowing, but are generally related to relative to those counterparties from an idealized simultane- not the collateral.balance sheet T toese illuminate collateralized those dealer-bank-speci transactionsfc andare gov- other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities.5 Some categories are excluded ous settlement of all claims in default, it does not necessarily erned by specifc SIFMA forms. (For a more detailed discus- with derivatives. sion of thesebecause transactions, they are less relevant see Adrian to the collateralized et al. [2011].) fnance reveal an accurate view of the dealer bank’s actual collateral business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined abovesources and typically and re usesfect a “sourcein real of” time, or “obligation nor of to the total amount of to apply a single framework consistently across frms whose return” cash.fnancing that the dealer bank is providing to customers. In 4 A repurchasereporting agreement, disclosures or repo, are is notan agreementalways homogenous. to sell a security with t
Equity rethisfects way, all balance-sheet the balance equity sheet accounts, and such the as collateral record ofer al- a commitment toAssets repurchase are grouped it at a into speci thef edcategories date in outlined the future, above usually and the earnings and stock issuance. ternative insights into the fnancing and funding conditions of next day, for a typicallystated price. refect T a e“use economic of” or “claim function to” cash. of these agreements is t
Instruments sold but not yet owned refect the dealer’s own essentially equivalentt
Cash towill a generallyshort-term include secured the dealer’s loan, and own usually funds that the are value of short positionsthe frms. in a f nancialCombining instrument, the such information as a security, from the balance sheet the securities purchasedheld in an is accountgreater withthan a the bank, cash such outlay, as a deposit with the with di af erence physicaland commodity, the collateral or derivative record contract. allows us to glimpse some of the referred to as a haircut.bank within For more the same details, bank see holding Copeland, company, Martin, a Federal and Walkert
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include collateral efciencies and “collateralized fnancing” efciencies (2010). For the party on the opposite side of the transaction, the agreement is refects a cash receipt and a pledge of a fnancial instrument, called a reverse repo.funds deposited with a bank that are fully segregated on such as experienceda security. Tese areby similar the dealer to the reverse bank. repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these 5 Te collateral record is divided into two categories, total Repurchase andt
Financial reverse repurchaseinstruments ownedagreements will re arefect typically the fair value governed of by a the dealer bank takes the opposing side of the trade. master repurchaserisky agreement positions (MRA) owned byor theglobal bank, master such as repurchase securities, phys agreement- t
Brokeragecollateral payables are received economically that similar can tobe repos/se repledged,- and total collateral (GMRA). Securitiesical borrowingcommodities, and principal securities investments, lending andare typicallyderivative governed curitiespledged lending, but (Table are generally 2). T relatede collateral to other collater record- refects sources and by a master securitiescontracts. lending In concept, agreement the fair (MSLA). value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to FRBNYthose counterparties Economic from Policy an idealized Review simultane / Forthcoming- 5 erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet the securities purchased is greater than the cash outlay, with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5 Table 1
Table 2
4UZMJ[FE
#BMBODF
4IFFU 4UZMJ[FE
$PMMBUFSBM
3FDPSE

Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables

t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchaseTable 1
agreements (reverse repo)/securities borrow-Table 2
transactions. ing generally4UZMJ[FE refects
#BMBODF a cash
4IFFU outlay and a receipt of a fnancial 4UZMJ[FE
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3FDPSE 4 While the balance sheet represents an accurate snapshot instrument as collateral, such as a security. Te reverse repo isCollateral Received Collateral Repledged Assets Liabilities and Equity of the net economic claims on and obligations of the dealer recorded onCash the balance sheet as theEquity value of the cash outlay, — — relative to those counterparties from an idealized simultane- not the collateral.Instruments T ownedese collateralizedInstruments transactions sold but not yet areowned gov- — — erned by speciReversefc repo/securities SIFMA5 borrowing forms. (ForRepo/securities a more lending detailed discus- ous settlement of all claims in default, it does not necessarily Brokerage receivables Brokerage payables sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of t
Brokerage receivables are economically similar to reverse repos/securitiesfnancing borrowing, that but the are dealer generally bank related is to providing to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with balance sheet to illuminate those dealer-bank-specifc and other formsthis of way,collateralized the balance lending, such sheet as brokerage and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded next day, for a stated price. Te economic function of these agreements is with derivatives.ternative insights into the fnancing and funding conditions of because they are less relevant to the collateralized fnance essentially equivalentbusiness tounique a short-term to dealer banking,secured while loan, others and usually are grouped the value of Liabilitiesthe and f equityrms. are Combining grouped into the the categories information out- from the balance sheet the securities purchasedtogether because is greater they are than economically the cash outlay, similar. with Tis theallows dif userence lined above andand typically the collateral refect a “source record of” or allows “obligation us toto glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walkerreturn” cash. to apply a single framework consistently across frms whose collateral efciencies and “collateralized fnancing” efciencies (2010). For thereporting party on disclosures the opposite are not side always of the homogenous. transaction, the agreementt
isEquity refects all balance-sheet equity accounts, such as called a reverse repo.Assets are grouped into the categories outlined above and earnings experiencedand stock issuance. by the dealer bank. typically refect a “use of” or “claim to” cash. 5 Repurchase and reverse repurchase agreements are typically governed byt
a Instruments soldT ebut collateral not yet owned record refect theis divideddealer’s own into two categories, total t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. (GMRA). Securities borrowing and securities lending are typically governed bank within the same bank holding company, a Federal t
Repurchasepledged agreements (Table (repos)/securities 2). Te lending collateral generally record refects sources and by a master securitiesReserve lending Bank, oragreement a third-party (MSLA). bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending,FRBNY but Economic are generally Policy related R toeview other collater/ Forthcoming- 5 contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet the securities purchased is greater than the cash outlay, with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5 Table 1
Table 2
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Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables

t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include Table 1
Table 2
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Financial instruments owned will refect the fair value of the dealer Cashbank takes the opposingEquity side of the trade. — — Instruments owned Instruments sold but not yet owned — — risky positions owned by the bank, such as securities, phys- t
Brokerage Reversepayables repo/securities are economically borrowing Repo/securities similar lending to repos/se- ical commodities, principal investments, and derivative curities lending,Brokerage receivables but are generallyBrokerage related payables to other collater- contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivativet
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection ing generally refects a cash outlay and a receipt of a fnancial unique fnancing activities. Some categories are excluded 4 While the balance sheet represents an accurate snapshot with derivatives. instrument as collateral, such as a security. Te reverse repo is because they are less relevant to the collateralized fnance of the net economic claims on and obligations of the dealer recorded on the balance sheet as the value of the cash outlay, business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- lined above and typically refect a “source of” or “obligation to not the collateral. Tese collateralized transactions are gov- relative to thosetogether counterparties because they are economically from an similar. idealized Tis allows simultane us - to apply a single framework consistently across frms whose return” cash. 5 ous settlement of all claims in default, it does not necessarily erned by specifc SIFMA forms. (For a more detailed discus- reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as sion of these transactions, see Adrian et al. [2011].) reveal an accurateAssets are view grouped of the into dealerthe categories bank’s outlined actual above collateral and earnings and stock issuance. sources andtypically uses reinf ectreal a “use time, of” ornor “claim of theto” cash. total amount of t
Instruments sold but not yet owned refect the dealer’s own fnancing thatt
Cash the will dealer generally bank include is theproviding dealer’s own to funds customers. that are In short positions in a fnancial instrument, such as a security, 4 held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include ternative insights into the fnancing and funding conditions ofre fects a cash receipt and a pledge of a fnancial instrument, next day, for a stated price. Te economic function of these agreements is funds deposited with a bank that are fully segregated on essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these the securities purchased is greater than the cash outlay, with the diference and the collateralt
Financial record instruments allows owned us willto reglimpsefect the fair some value of of the the dealer bank takes the opposing side of the trade. referred to as a haircut. For more details, see Copeland, Martin, and Walker risky positions owned by the bank, such as securities, phys- (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efcienciest
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- called a reverse repo. experienced by the dealer bank. contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot (GMRA). Securities borrowing and securities lending are typically governed pledged (Tableinstrument 2). T ase collateral,collateral such record as a security. re4f Tectse reverse sources repo is and by a master securities lending agreement (MSLA). recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 FRBNY EconomicA repurchase Policy agreement, Review or repo, / F isorthcoming an agreement to sell a security with this5 way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet the securities purchased is greater than the cash outlay, with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5 Table 1
Table 2
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Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables

t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral Table 1
Table 2
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3FDPSE uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 Collateral Received Collateral Repledged A repurchase agreement,Assets or repo, is an agreementLiabilities to sell and a Equity security with this way, the balance sheet and the collateral record ofer al- a commitment toCash repurchase it at a specifedEquity date in the future, usually the — — next day, for a statedInstruments price. owned Te economic functionInstruments of sold these but not agreements yet owned is ternative— insights into the —fnancing and funding conditions of essentially equivalentReverse repo/securitiesto a short-term borrowing securedRepo/securities loan, and lending usually the value of the frms. Combining the information from the balance sheet the securities purchasedBrokerage receivables is greater than theBrokerage cash outlay, payables with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies t
Brokerage receivables are economically similar to reverse called a reverse repo. repos/securitiesexperienced borrowing, by but the are dealergenerally bank. related to other forms of collateralized lending, such as brokerage 5 Repurchase balanceand reverse sheet repurchaseto illuminate agreements those dealer-bank-speci are typicallyfc governedand by a Te collateral record is divided into two categories, total customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded master repurchase agreement (MRA) or global master repurchase agreementwith derivatives.collateral received that can be repledged, and total collateral (GMRA). Securitiesbecause borrowingthey are less andrelevant securities to the collateralizedlending are typicallyfnance governed pledged (Table 2). Te collateral record refects sources and by a master securitiesbusiness unique lending to agreementdealer banking, (MSLA). while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own FRBNY Economic Policy Review / Forthcoming 5 t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet the securities purchased is greater than the cash outlay, with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5 Table 1
Table 2
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Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables

t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending,Table 1
but are generally related to other collater- Table 2
contracts. In concept, the fair value refects the cash that alized borrowings,4UZMJ[FE
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Reverse repurchase agreements (reverse repo)/securities borrow- transactions. Cash Equity — — ing generally refects a cash outlay and a receipt of a fnancial While theInstruments balance owned sheet representsInstruments an accurate sold but not snapshot yet owned — — instrument as collateral, such as a security.4 Te reverse repo is of the net economicReverse repo/securities claims borrowing on and Repo/securitiesobligations lending of the dealer recorded on the balance sheet as the value of the cash outlay, Brokerage receivables Brokerage payables not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- 5 ous settlement of all claims in default, it does not necessarily erned by specifc SIFMA forms. (For a more detailed discus- t
Brokerage receivables are economically similar to reverse sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral repos/securities borrowing, but are generally related to sources andbalance uses sheet in real to illuminate time, nor those of dealer-bank-speci the total amountfc and of other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection fnancing uniquethat the fnancing dealer activities. bank is Some providing categories to are customers. excluded In 4 with derivatives. A repurchase agreement, or repo, is an agreement to sell a security with this way, thebecause balance they are sheet less relevant and the to thecollateral collateralized record fnance of er al- a commitment to repurchase it at a specifed date in the future, usually the business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- next day, for a stated price. Te economic function of these agreements is ternative insightstogether because into the they f arenancing economically and fundingsimilar. T isconditions allows us oflined above and typically refect a “source of” or “obligation to essentially equivalent to a short-term secured loan, and usually the value of the frms.to Combining apply a single theframework information consistently from across the f rmsbalance whose sheet return” cash. the securities purchased is greater than the cash outlay, with the diference and the collateralreporting disclosuresrecord allows are not us always to glimpse homogenous. some of the t
Equity refects all balance-sheet equity accounts, such as referred to as a haircut. For more details, see Copeland, Martin, and Walker Assets are grouped into the categories outlined above and earnings and stock issuance. (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own called a reverse repo. experienced by the dealer bank. t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateralheld in record an account is divided with a bank, into such two as acategories, deposit with totala physical commodity, or derivative contract. master repurchase agreement (MRA) or global master repurchase agreement collateral receivedbank within that the can same be bank repledged, holding company, and total a Federal collateral t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include (GMRA). Securities borrowing and securities lending are typically governed refects a cash receipt and a pledge of a fnancial instrument, pledged (Tablefunds 2). deposited Te collateral with a bank record that are re fullyfects segregated sources on and by a master securities lending agreement (MSLA). such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that FRBNY Economic Policy Review / Forthcoming 5 alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet the securities purchased is greater than the cash outlay, with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5 Table 1
Table 2
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Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities Tandable 1
equity are grouped into the categories outT-able 2
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Equity refInstrumentsects all ownedbalance-sheetInstruments equity sold accounts, but not yet owned such as — — Assets are grouped into the categories outlined above and earnings andReverse stock repo/securities issuance. borrowing Repo/securities lending typically refect a “use of” or “claim to” cash. Brokerage receivables Brokerage payables t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security,t
Brokerage receivables are economically similar to reverse held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage bank within the same bank holding company, a Federal customer margin loans and collateral posted in connection t
Repurchaseunique agreements fnancing activities. (repos)/securities Some categories are lending excluded generally Reserve Bank, or a third-party bank. Cash will also include with derivatives. refects abecause cash theyreceipt are less and relevant a pledge to the collateralized of a fnancial fnance instrument, funds deposited with a bank that are fully segregated on Liabilities and equity are grouped into the categories out- such as abusiness security. unique T toese dealer are banking, similar while to others the reverseare grouped repo/secu - behalf of a customer of the dealer. together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to rities borrowingto apply a single transactions framework consistently described across above, frms whose but in thesereturn” cash. t
Financial instruments owned will refect the fair value of the dealerreporting bank disclosures takes the are opposing not always homogenous. side of the trade. t
Equity refects all balance-sheet equity accounts, such as risky positions owned by the bank, such as securities, phys- Assets are grouped into the categories outlined above and earnings and stock issuance. t
Brokeragetypically payables refect aare “use economically of” or “claim to” cash. similar to repos/se- ical commodities, principal investments, and derivative t
Instruments sold but not yet owned refect the dealer’s own curities lending,t
Cash will butgenerally are include generally the dealer’s related own funds to other that are collater short- positions in a fnancial instrument, such as a security, contracts. In concept, the fair value refects the cash that alized borrowings,held in an account such with as abrokerage bank, such as customera deposit with credita balphysical- commodity, or derivative contract. could be obtained upon sale of the instrument. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include ances and collateral received in connection with derivativerefects a cash receipt and a pledge of a fnancial instrument, t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions.funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. ing generally refects a cash outlay and a receipt of a fnancial rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. 4 While the balance sheet represents an accurate snapshot instrument as collateral, such as a security. Te reverse repo is risky positions owned by the bank, such as securities, phys- of the net economic claims on and obligations of the dealert
Brokerage payables are economically similar to repos/se- recorded on the balance sheet as the value of the cash outlay, ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultanealized- borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative 5 erned by specifc SIFMA forms. (For a more detailed discus- ous settlementt
Reverse of all repurchase claims agreements in default, (reverse repo)/securitiesit does not borrow necessarily- transactions. ing generally refects a cash outlay and a receipt of a fnancial sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateralWhile the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is sources and usesrecorded in onreal the balancetime, sheet nor as of the thevalue totalof the cash amount outlay, of of the net economic claims on and obligations of the dealer fnancing thatnot the the collateral.dealer Tbankese collateralized is providing transactions to customers.are gov- Inrelative to those counterparties from an idealized simultane- 5 ous settlement of all claims in default, it does not necessarily 4 A repurchase agreement, or repo, is an agreement to sell a security with erned by specifc SIFMA forms. (For a more detailed discus- this way, the balance sheet and the collateral record ofer alreveal- an accurate view of the dealer bank’s actual collateral a commitment to repurchase it at a specifed date in the future, usually the sion of these transactions, see Adrian et al. [2011].) ternative insights into the fnancing and funding conditionssources of and uses in real time, nor of the total amount of next day, for a stated price. Te economic function of these agreements is fnancing that the dealer bank is providing to customers. In 4 essentially equivalent to a short-term secured loan, and usually the value of the frms. CombiningA repurchase agreement, the orinformation repo, is an agreement from to sell a securitythe balance with sheetthis way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the the securities purchased is greater than the cash outlay, with the diference and the collateralnext day, for record a stated price. allows Te economic us functionto glimpse of these agreements some is of theternative insights into the fnancing and funding conditions of referred to as a haircut. For more details, see Copeland, Martin, and Walker essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet collateral eftheciencies securities purchased and is “collateralizedgreater than the cash outlay, f withnancing” the diference e fcienciesand the collateral record allows us to glimpse some of the (2010). For the party on the opposite side of the transaction, the agreement is referred to as a haircut. For more details, see Copeland, Martin, and Walker called a reverse repo. experienced(2010). by Forthe the dealerparty on the bank. opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Te collateral record is divided into two categories, total Repurchase and reverse repurchase agreements are typically governed by a 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral receivedmaster repurchase that agreement can be (MRA) repledged, or global master andrepurchase total agreement collateral collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and (GMRA). Securities borrowing and securities lending are typically governed pledged (Tableby a master 2). securities Te collateral lending agreement record (MSLA). refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5

FRBNY Economic Policy Review / Forthcoming 5 Table 1
Table 2
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Assets Liabilities and Equity Collateral Received Collateral Repledged

Cash Equity — — Instruments owned Instruments sold but not yet owned — — Reverse repo/securities borrowing Repo/securities lending Brokerage receivables Brokerage payables

t
Brokerage receivables are economically similar to reverse repos/securities borrowing, but are generally related to balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage customer margin loans and collateral posted in connection unique fnancing activities. Some categories are excluded with derivatives. because they are less relevant to the collateralized fnance business unique to dealer banking, while others are grouped Liabilities and equity are grouped into the categories out- together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to to apply a single framework consistently across frms whose return” cash. reporting disclosures are not always homogenous. t
Equity refects all balance-sheet equity accounts, such as Assets are grouped into the categories outlined above and earnings and stock issuance. typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, funds deposited with a bank that are fully segregated on such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is Table 1
Table 2
recorded on the balance sheet as the value of the cash outlay, of the net economic4UZMJ[FE
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3FDPSE relative to those counterparties from an idealized simultane- not the collateral. Tese collateralized transactions are gov- Assets Liabilities and Equity Collateral Received Collateral Repledged 5 ous settlement of all claims in default, it does not necessarily erned by specifc SIFMA forms. (For a more detailed discus- Cash Equity — — sion of these transactions, see Adrian et al. [2011].) reveal an accurateInstruments view owned of the dealerInstruments bank’s sold actual but not collateralyet owned — — sources and Reverseuses repo/securitiesin real time, borrowing nor ofRepo/securities the total lending amount of fnancing thatBrokerage the dealer receivables bank is providingBrokerage payables to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the t
Brokerage receivables are economically similar to reverse next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of repos/securities borrowing, but are generally related to essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet balance sheet to illuminate those dealer-bank-specifc and other forms of collateralized lending, such as brokerage the securities purchased is greater than the cash outlay, with the diference customer margin loans and collateral posted in connection and the collateralunique fnancing record activities. allows Some us to categories glimpse are some excluded of the referred to as a haircut. For more details, see Copeland, Martin, and Walker with derivatives. (2010). For the party on the opposite side of the transaction, the agreement is collateral ebecausefciencies they are and less “collateralizedrelevant to the collateralized fnancing” fnance ef ciencies Liabilities and equity are grouped into the categories out- called a reverse repo. experiencedbusiness by the unique dealer to dealer bank. banking, while others are grouped together because they are economically similar. Tis allows us lined above and typically refect a “source of” or “obligation to 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateralto apply arecord single framework is divided consistently into two across categories, frms whose total return” cash. master repurchase agreement (MRA) or global master repurchase agreement collateral receivedreporting disclosures that can are be not repledged, always homogenous. and total collateral t
Equity refects all balance-sheet equity accounts, such as (GMRA). Securities borrowing and securities lending are typically governed pledged (TableAssets 2). are T groupede collateral into the record categories re outlinedfects sources above and and earnings and stock issuance. by a master securities lending agreement (MSLA). typically refect a “use of” or “claim to” cash. t
Instruments sold but not yet owned refect the dealer’s own t
Cash will generally include the dealer’s own funds that are short positions in a fnancial instrument, such as a security, held in an account with a bank, such as a deposit with a physical commodity, or derivative contract. bank within the same bank holding company, a Federal t
Repurchase agreements (repos)/securities lending generally Reserve Bank, or a third-party bank. Cash will also include refects a cash receipt and a pledge of a fnancial instrument, FRBNY Economicfunds P depositedolicy Review with a /bank Forthcoming that are fully segregated on 5 such as a security. Tese are similar to the reverse repo/secu- behalf of a customer of the dealer. rities borrowing transactions described above, but in these t
Financial instruments owned will refect the fair value of the dealer bank takes the opposing side of the trade. risky positions owned by the bank, such as securities, phys- t
Brokerage payables are economically similar to repos/se- ical commodities, principal investments, and derivative curities lending, but are generally related to other collater- contracts. In concept, the fair value refects the cash that alized borrowings, such as brokerage customer credit bal- could be obtained upon sale of the instrument. ances and collateral received in connection with derivative t
Reverse repurchase agreements (reverse repo)/securities borrow- transactions. ing generally refects a cash outlay and a receipt of a fnancial While the balance sheet represents an accurate snapshot instrument as collateral, such as a security.4 Te reverse repo is recorded on the balance sheet as the value of the cash outlay, of the net economic claims on and obligations of the dealer not the collateral. Tese collateralized transactions are gov- relative to those counterparties from an idealized simultane- erned by specifc SIFMA5 forms. (For a more detailed discus- ous settlement of all claims in default, it does not necessarily sion of these transactions, see Adrian et al. [2011].) reveal an accurate view of the dealer bank’s actual collateral sources and uses in real time, nor of the total amount of fnancing that the dealer bank is providing to customers. In 4 A repurchase agreement, or repo, is an agreement to sell a security with this way, the balance sheet and the collateral record ofer al- a commitment to repurchase it at a specifed date in the future, usually the next day, for a stated price. Te economic function of these agreements is ternative insights into the fnancing and funding conditions of essentially equivalent to a short-term secured loan, and usually the value of the frms. Combining the information from the balance sheet the securities purchased is greater than the cash outlay, with the diference and the collateral record allows us to glimpse some of the referred to as a haircut. For more details, see Copeland, Martin, and Walker (2010). For the party on the opposite side of the transaction, the agreement is collateral efciencies and “collateralized fnancing” efciencies called a reverse repo. experienced by the dealer bank. 5 Repurchase and reverse repurchase agreements are typically governed by a Te collateral record is divided into two categories, total master repurchase agreement (MRA) or global master repurchase agreement collateral received that can be repledged, and total collateral (GMRA). Securities borrowing and securities lending are typically governed pledged (Table 2). Te collateral record refects sources and by a master securities lending agreement (MSLA).

FRBNY Economic Policy Review / Forthcoming 5 Main Liabilities: Collateralized Borrowings

Securi'es)BD)Repo)and)Securi'es)Credit/GDP)(L)128)) 25%#

20%#

15%# Total Assets/GDP 10%#

5%#

0%# Jul*64# Jul*01# Jan*83# Jun*61# Jun*98# Oct*73# Oct*10# Apr*55# Apr*92# Sep*70# Feb*86# Sep*07# Dec*79# Aug*67# Aug*04# Nov*76# Mar*52# Mar*89# May*95# May*58# Two different data slices to compare to 1914-1940 data • Gross versus net balance sheet

• Flow of Funds L 128 shows only net repo liabilities

• Underlying detail show gross repo

• Gross data comparable to data 1914-1940

• Scale of financing coming from deposit taking institutions and money market mutual funds Broker Dealer Gross Collateralized Assets and Liabilities/GDP

60%% 50%% Assets% 40%% LiabiliBes% 30%% Net% 20%% Total%Assets% 10%% 0%% !10%% Jul!77% Jul!96% Jul!58% Jan!68% Jan!87% Jan!06% Sep!80% Sep!99% Sep!61% Nov!64% Nov!83% Nov!02% Mar!52% Mar!90% Mar!09% Mar!71% May!55% May!93% May!12% !20%% May!74% !30%% !40%% !50%% Net Collateralized Borrowing 1.5%&

1.0%&

0.5%&

0.0%&

!0.5%& Jul!77& Jul!96& Jul!58& Jan!68& Jan!87& Jan!06& Sep!80& Sep!99& Sep!61& Nov!64& Nov!83& Nov!02& Mar!52& Mar!90& Mar!09& Mar!71& May!55& May!93& May!12& May!74& !1.0%&

!1.5%& Net&

!2.0%&

!2.5%&

!3.0%&

!3.5%& Securities BD holdings of securities and short positions Flow of Funds data on securities owned/GDP

14%$

12%$

10%$ Long$ 8%$ Short$ 6%$ Net$ 4%$

2%$

0%$ J!58$ J!68$ J!77$ J!87$ J!96$ J!06$ S!61$ S!80$ S!99$ !2%$ N!64$ N!83$ N!02$ M!52$ M!55$ M!71$ M!74$ M!90$ M!93$ M!09$ M!12$

!4%$

!6%$ Summary

• Big growth of broker dealer intermediation of credit to facilitate investors buying securities on margin and selling short

• Big change from old business of fee income and no balance sheet

• Big drop in gross balance sheets in fall of 2008 Have we seen this movie before?

• Maybe. 1925-1929 big growth and collapse in the balance sheets of securities broker dealers and non-bank lending to broker dealers.

• But few apparent systemic consequences from all of this turmoil (Neither brokers nor New York banks failed in 1929/30) NYSE Brokers’ Borrowings Historical Banking and Monetary Statistics 1914-1941

Broker's(Loans(by(Groups(of(Lenders( in(billions(of(dollars( 9" Total" 8" NY"City"Banks" 7" Total"from"banks" 6" 5" 4" 3" 2" 1" 0" Sep/19" Sep/20" Sep/22" Sep/23" Sep/25" Sep/26" Sep/27" Sep/29" Sep/30" Sep/32" Sep/33" Sep/35" Sep/36" Sep/37" Sep/18" Sep/21" Sep/24" Sep/28" Sep/31" Sep/34" Sep/38" NYSE Brokers’ Borrowings Historical Banking and Monetary Statistics 1914-1941

Broker's(Loans(by(Groups(of(Lenders( in(billions(of(dollars( 9" Total" 8" Borrowings reported by NY"City"Banks" 7" members of the NYSE Total"from"banks" 6" 5" 4" 3" 2" 1" 0" Sep/19" Sep/20" Sep/22" Sep/23" Sep/25" Sep/26" Sep/27" Sep/29" Sep/30" Sep/32" Sep/33" Sep/35" Sep/36" Sep/37" Sep/18" Sep/21" Sep/24" Sep/28" Sep/31" Sep/34" Sep/38" NYSE Brokers’ Borrowings Historical Banking and Monetary Statistics 1914-1941

Broker's(Loans(by(Groups(of(Lenders( in(billions(of(dollars( 9" Total" 8" Lending to Call Market NY"City"Banks" 7" reported by banks Total"from"banks" 6" 5" 4" 3" 2" 1" 0" Sep/19" Sep/20" Sep/22" Sep/23" Sep/25" Sep/26" Sep/27" Sep/29" Sep/30" Sep/32" Sep/33" Sep/35" Sep/36" Sep/37" Sep/18" Sep/21" Sep/24" Sep/28" Sep/31" Sep/34" Sep/38" NYSE Brokers’ Borrowings Historical Banking and Monetary Statistics 1914-1941

Broker's(Loans(by(Groups(of(Lenders( in(billions(of(dollars( 9" Total" 8" Run on Shadow banking? NY"City"Banks" 7" Total"from"banks" 6" 5" 4" 3" 2" 1" 0" Sep/19" Sep/20" Sep/22" Sep/23" Sep/25" Sep/26" Sep/27" Sep/29" Sep/30" Sep/32" Sep/33" Sep/35" Sep/36" Sep/37" Sep/18" Sep/21" Sep/24" Sep/28" Sep/31" Sep/34" Sep/38" No run on New York Banks with Crash of 1929

Broker's(Loans(and(Deposits(in(New(York(Money(Center(Banks( in(billions(of(dollars( 12" Brokers'"Loans" 10" Deposits"in"New"York" 8" City"Banks"

6"

4"

2"

0" Sep+19" Sep+20" Sep+22" Sep+23" Sep+25" Sep+26" Sep+27" Sep+29" Sep+30" Sep+32" Sep+33" Sep+35" Sep+36" Sep+37" Sep+18" Sep+21" Sep+24" Sep+28" Sep+31" Sep+34" Sep+38" Bank runs came later

Broker's(Loans(and(Deposits(in(billions(of(dollars( 70" Brokers'"Loans" Deposits"in"New"York"City"Banks" All"Fed"Member"Banks" All"Banks" 60"

50"

40"

30"

20" Bank Runs Come Later

10"

0" Sep-19" Sep-20" Sep-22" Sep-23" Sep-25" Sep-26" Sep-27" Sep-29" Sep-30" Sep-32" Sep-33" Sep-35" Sep-36" Sep-37" Sep-18" Sep-21" Sep-24" Sep-28" Sep-31" Sep-34" Sep-38" What was different in 1929?

• Sprague (1910): pre-Fed banking crises had their origination in the New York Call Money Market

• 1873 Failure of Jay Cooke underwriting railroad bonds spread to banks. Concern about similar exposure to railroads

• 1907 Run on Trust Companies spread to banks through call market

• National Monetary Commission advocated creation of central bank in part to eliminate the transmission of crises from the call money market to banks

• Common Hypothesis: The experience in the Crash of 1929 was different due to intervention of New York Fed

• So why didn’t this work in 2008? Motivations for Borrowing and Lending Securities • Some investors want to go short a particular security

• Dispersion in beliefs drives size dispersion of positions

• Security-Market line / Two-fund theorem

• Some investors want a levered position in the market as a whole

• Others want mostly cash

• Volume of margin lending driven by differences in risk aversion and margin requirements

• Could consider asset pricing and welfare considerations of margin requirements 2 Croaeadfrinbns5. 4117715314817115312314910414812 174.8 9 170.4 243.3 14 164.9 1670.6 245.8 1537.3 162.3 241.4 1413.7 5 155.3 238.2 1434.0 81.7 147.1 1324.4 231.1 78.3 174.8 1268.2 7 221.1 291.1 1670.6 155.3 77.5 2 243.3 1324.4 280.6 107.7 173.6 71.6 1042.6 231.1 278.5 74.1 170.2 986.8 178.8 65.0 272.1 170.0 773.1 55.4 132.7 62.5 257.2 163.5 103.0 253.3 81.7 155.9 291.1 152.2 65.0 257.2 173.6 57.4 241.3 155.9 14Totalsharesoutstanding(liabilities) 59.8 243.8 144.7 13Corporateequities 229.3 55.6 146.4 12Corporateandforeignbonds 9 11Municipalsecurities 141.1 10Treasurysecurities 145.4 9Creditmarketinstruments 137.9 8Totalfinancialassets 130.9 Exchange-tradedfunds 12 113.4 11526.8 6 8 7Totalsharesoutstanding(liabilities) 105.7 10904.9 837.0 2001.4 10299.5 6Corporateequities 100.6 1947.3 10087.4 836.4 5Corporateandforeignbonds 9323.6 2 1868.5 4Municipalsecurities 145.4 3 874.3 9131.0 3Treasurysecurities 358.4 1816.6 4342.2 105.7 2Creditmarketinstruments 11526.8 870.5 1719.4 354.0 4287.7 9323.6 93.5 1633.4 1Totalfinancialassets 871.8 4242.8 7870.9 328.2 2001.4 74.6 4184.4 7873.0 876.0 Closed-endfunds 307.9 1719.4 3981.3 6920.7 837.0 75.4 1413.4 262.7 3851.6 Billions ofdollars;amountsoutstandingendperiod, notseasonallyadjusted 1243.0 871.8 286.8 4342.2 L.122 Closed-EndandExchange-Traded Funds 1120.7 784.8 3981.3 358.4 3329.3 680.1 262.7 2969.9 (1) Open-endinvestmentcompanies; excludesfundingvehiclesforvariableannuities,which areincludedinthelifeinsurancesector(tableL.115). 11 603.2 108.7 102.1 2616.3 12Totalsharesoutstanding (liabilities) 137.5 89.1 11Miscellaneousassets 13 153.3 10Corporateequities 90.7 2678.3 9 2637.4 361.1 9Other loans andadvances 103.0 3 8 Corporateand foreignbonds 2541.9 354.0 13.3 4 7 Municipalsecurities 102.1 2554.0 5 6 Agency- and GSE-backed securities 494.9 6 345.0 2649.6 493.0 93.0 5 Treasury securities 11.0 1611.8 4 Open market paper 494.4 325.6 2506.9 489.1 1572.8 102.1 27.5 2678.3 444.3 3Creditmarket instruments 343.5 1550.9 450.4 102.1 2649.6 10.9 429.4 1562.7 331.4 2Security repurchaseagreements 470.7 2642.5 105.1 1580.9 435.4 16.5 361.1 2755.4 1Totalfinancialassets 544.7 1520.2 154.2 396.9 3258.6 343.5 11.3 513.2 1611.8 169.9 494.9 Billions ofdollars;amounts outstandingendofperiod,notseasonallyadjusted 403.7 1580.9 493.0 13.3 L.121 MutualFunds(1) 1663.6 435.4 402.8 544.7 1673.4 16.5 402.7 543.0 490.5 2070.0 (1) Open-endinvestmentcompanies;excludesfundingvehicles forvariableannuities,whichareincludedinthelifeinsurancesector(tableL.115). 458.9 20.1 479.4 566.6 13Totalsharesoutstanding(liabilities) 14.2 480.0 12Miscellaneousassets 17.9 11Corporateandforeignbonds 10Municipalsecurities 9Agency-andGSE-backedsecurities 8Treasurysecurities 7Openmarketpaper 6Creditmarketinstruments 5Securityrepurchaseagreements 4Timeandsavingsdeposits 3Checkabledepositsandcurrency 2Foreigndeposits 1Totalfinancialassets Billions ofdollars;amountsoutstandingendperiod,notseasonallyadjusted L.120 MoneyMarketMutualFunds(1) Assets in Banks 0921 0121 032012 2013 2012 2011 2010 2009 16246. 47250. 89253. 17051. 73864. 89210 6809.2 6246.2 5743.8 5611.2 5107.0 5037.8 6809.2 5107.0 4427.2 4762.7 1 4136.2 11526.8 10904.9 10299.5 10087.4 9323.6 9131.0 11526.8 9323.6 7870.9 7873.0 6920.7 1 2678.3 2637.4 2541.9 2554.0 2649.6 2506.9 2678.3 2649.6 2642.5 2755.4 3258.6 7. 2. 4. 2. 1. 1. 2. 4. 4. 2. 1. 7 610.9 5 620.7 641.4 641.0 640.9 646.6 627.5 627.4 638.9 610.5 579.6 610.9 531.3 627.4 641.4 541.2 579.6 525.5 456.6 478.8 380.5 258.0 10 308.3 8 7 305.1 488.2 352.1 309.6 466.5 357.9 312.5 449.0 356.6 336.7 470.5 351.1 320.1 457.8 340.8 308.3 456.3 319.4 336.7 488.2 352.1 357.3 457.8 340.8 386.7 443.3 354.2 440.1 335.4 394.2 406.4 510.5 7. 5. 6. 03312. 07119. 15917. 21512. 13 1427.3 1291.5 1172.2 1195.9 8 1093.3 1670.6 1047.1 1537.3 1427.3 1413.7 1093.3 1434.0 863.8 1324.4 854.1 1268.2 1 291.1 670.0 1670.6 1324.4 280.6 1042.6 278.5 986.8 272.1 773.1 257.2 253.3 291.1 257.2 241.3 243.8 229.3 492957-741. 4. 2. 1. 1. 701. 11 17.0 17.0 -15.3 -16.2 4 -27.4 106.1 -45.3 104.6 17.0 100.7 -27.4 98.5 5.7 77.5 99.8 2.9 106.1 14.9 77.5 12 40.0 31.7 66.3 33.8 80.2 31.9 31.5 28.8 25.1 2 31.7 33.7 28.8 36.3 22.7 37.1 23.5 48.7 26.9 43.3 40.2 33.7 43.3 42.9 105.9 97.1 185. 246. 716. 366. 416. 7110 57.1 63.9 64.1 62.8 63.6 4 6 86.1 62.7 117.6 86.1 57.1 110.4 86.8 63.6 108.4 86.2 62.4 108.6 101.3 85.7 51.0 101.1 84.5 41.8 117.6 86.1 101.3 85.7 96.5 82.5 97.4 81.5 88.1 81.2 . . . 231. 131. 301. 151. 11 11.4 11.5 12.5 13.0 3 12.3 5.8 11.3 5.8 11.4 5.8 12.3 5.7 8.6 5.2 7.6 5.2 5.9 5.8 5.2 4.8 5.1 4.4 3Q 1Q 3Q4 Q3 Q2 Q1 Q4 Q3 Z.1, March6,2014 2013 83

Levels 2 Croaeadfrinbns5. 4117715314817115312314910414812 174.8 9 170.4 243.3 14 164.9 1670.6 245.8 1537.3 162.3 241.4 1413.7 5 155.3 238.2 1434.0 81.7 147.1 1324.4 231.1 78.3 174.8 1268.2 7 221.1 291.1 1670.6 155.3 77.5 2 243.3 1324.4 280.6 107.7 173.6 71.6 1042.6 231.1 278.5 74.1 170.2 986.8 178.8 65.0 272.1 170.0 773.1 55.4 132.7 62.5 257.2 163.5 103.0 253.3 81.7 155.9 291.1 152.2 65.0 257.2 173.6 57.4 241.3 155.9 14Totalsharesoutstanding(liabilities) 59.8 243.8 144.7 13Corporateequities 229.3 55.6 146.4 12Corporateandforeignbonds 9 11Municipalsecurities 141.1 10Treasurysecurities 145.4 9Creditmarketinstruments 137.9 8Totalfinancialassets 130.9 Exchange-tradedfunds 12 113.4 11526.8 6 8 7Totalsharesoutstanding(liabilities) 105.7 10904.9 837.0 2001.4 10299.5 6Corporateequities 100.6 1947.3 10087.4 836.4 5Corporateandforeignbonds 9323.6 2 1868.5 4Municipalsecurities 145.4 3 874.3 9131.0 3Treasurysecurities 358.4 1816.6 4342.2 105.7 2Creditmarketinstruments 11526.8 870.5 1719.4 354.0 4287.7 9323.6 93.5 1633.4 1Totalfinancialassets 871.8 4242.8 7870.9 328.2 2001.4 74.6 4184.4 7873.0 876.0 Closed-endfunds 307.9 1719.4 3981.3 6920.7 837.0 75.4 1413.4 262.7 3851.6 Billions ofdollars;amountsoutstandingendperiod, notseasonallyadjusted 1243.0 871.8 286.8 4342.2 L.122 Closed-EndandExchange-Traded Funds 1120.7 784.8 3981.3 358.4 3329.3 680.1 262.7 2969.9 (1) Open-endinvestmentcompanies; excludesfundingvehiclesforvariableannuities,which areincludedinthelifeinsurancesector(tableL.115). 11 603.2 108.7 102.1 2616.3 12Totalsharesoutstanding (liabilities) 137.5 89.1 11Miscellaneousassets 13 153.3 10Corporateequities 90.7 2678.3 9 2637.4 361.1 9Other loans andadvances 103.0 3 8 Corporateand foreignbonds 2541.9 354.0 13.3 4 7 Municipalsecurities 102.1 2554.0 5 6 Agency- and GSE-backed securities 494.9 6 345.0 2649.6 493.0 93.0 5 Treasury securities 11.0 1611.8 4 Open market paper 494.4 325.6 2506.9 489.1 1572.8 102.1 27.5 2678.3 444.3 3Creditmarket instruments 343.5 1550.9 450.4 102.1 2649.6 10.9 429.4 1562.7 331.4 2Security repurchaseagreements 470.7 2642.5 105.1 1580.9 435.4 16.5 361.1 2755.4 1Totalfinancialassets 544.7 1520.2 154.2 396.9 3258.6 343.5 11.3 513.2 1611.8 169.9 494.9 Billions ofdollars;amounts outstandingendofperiod,notseasonallyadjusted 403.7 1580.9 493.0 13.3 L.121 MutualFunds(1) 1663.6 435.4 402.8 544.7 1673.4 16.5 402.7 543.0 490.5 2070.0 (1) Open-endinvestmentcompanies;excludesfundingvehicles forvariableannuities,whichareincludedinthelifeinsurancesector(tableL.115). 458.9 20.1 479.4 566.6 13Totalsharesoutstanding(liabilities) 14.2 480.0 12Miscellaneousassets 17.9 11Corporateandforeignbonds 10Municipalsecurities 9Agency-andGSE-backedsecurities 8Treasurysecurities 7Openmarketpaper 6Creditmarketinstruments 5Securityrepurchaseagreements 4Timeandsavingsdeposits 3Checkabledepositsandcurrency 2Foreigndeposits 1Totalfinancialassets Billions ofdollars;amountsoutstandingendperiod,notseasonallyadjusted L.120 MoneyMarketMutualFunds(1) Assets in Repos 0921 0121 032012 2013 2012 2011 2010 2009 16246. 47250. 89253. 17051. 73864. 89210 6809.2 6246.2 5743.8 5611.2 5107.0 5037.8 6809.2 5107.0 4427.2 4762.7 1 4136.2 11526.8 10904.9 10299.5 10087.4 9323.6 9131.0 11526.8 9323.6 7870.9 7873.0 6920.7 1 2678.3 2637.4 2541.9 2554.0 2649.6 2506.9 2678.3 2649.6 2642.5 2755.4 3258.6 7. 2. 4. 2. 1. 1. 2. 4. 4. 2. 1. 7 610.9 5 620.7 641.4 641.0 640.9 646.6 627.5 627.4 638.9 610.5 579.6 610.9 531.3 627.4 641.4 541.2 579.6 525.5 456.6 478.8 380.5 258.0 10 308.3 8 7 305.1 488.2 352.1 309.6 466.5 357.9 312.5 449.0 356.6 336.7 470.5 351.1 320.1 457.8 340.8 308.3 456.3 319.4 336.7 488.2 352.1 357.3 457.8 340.8 386.7 443.3 354.2 440.1 335.4 394.2 406.4 510.5 7. 5. 6. 03312. 07119. 15917. 21512. 13 1427.3 1291.5 1172.2 1195.9 8 1093.3 1670.6 1047.1 1537.3 1427.3 1413.7 1093.3 1434.0 863.8 1324.4 854.1 1268.2 1 291.1 670.0 1670.6 1324.4 280.6 1042.6 278.5 986.8 272.1 773.1 257.2 253.3 291.1 257.2 241.3 243.8 229.3 492957-741. 4. 2. 1. 1. 701. 11 17.0 17.0 -15.3 -16.2 4 -27.4 106.1 -45.3 104.6 17.0 100.7 -27.4 98.5 5.7 77.5 99.8 2.9 106.1 14.9 77.5 12 40.0 31.7 66.3 33.8 80.2 31.9 31.5 28.8 25.1 2 31.7 33.7 28.8 36.3 22.7 37.1 23.5 48.7 26.9 43.3 40.2 33.7 43.3 42.9 105.9 97.1 185. 246. 716. 366. 416. 7110 57.1 63.9 64.1 62.8 63.6 4 6 86.1 62.7 117.6 86.1 57.1 110.4 86.8 63.6 108.4 86.2 62.4 108.6 101.3 85.7 51.0 101.1 84.5 41.8 117.6 86.1 101.3 85.7 96.5 82.5 97.4 81.5 88.1 81.2 . . . 231. 131. 301. 151. 11 11.4 11.5 12.5 13.0 3 12.3 5.8 11.3 5.8 11.4 5.8 12.3 5.7 8.6 5.2 7.6 5.2 5.9 5.8 5.2 4.8 5.1 4.4 3Q 1Q 3Q4 Q3 Q2 Q1 Q4 Q3 Z.1, March6,2014 2013 83

Levels 2 Croaeadfrinbns5. 4117715314817115312314910414812 174.8 9 170.4 243.3 14 164.9 1670.6 245.8 1537.3 162.3 241.4 1413.7 5 155.3 238.2 1434.0 81.7 147.1 1324.4 231.1 78.3 174.8 1268.2 7 221.1 291.1 1670.6 155.3 77.5 2 243.3 1324.4 280.6 107.7 173.6 71.6 1042.6 231.1 278.5 74.1 170.2 986.8 178.8 65.0 272.1 170.0 773.1 55.4 132.7 62.5 257.2 163.5 103.0 253.3 81.7 155.9 291.1 152.2 65.0 257.2 173.6 57.4 241.3 155.9 14Totalsharesoutstanding(liabilities) 59.8 243.8 144.7 13Corporateequities 229.3 55.6 146.4 12Corporateandforeignbonds 9 11Municipalsecurities 141.1 10Treasurysecurities 145.4 9Creditmarketinstruments 137.9 8Totalfinancialassets 130.9 Exchange-tradedfunds 12 113.4 11526.8 6 8 7Totalsharesoutstanding(liabilities) 105.7 10904.9 837.0 2001.4 10299.5 6Corporateequities 100.6 1947.3 10087.4 836.4 5Corporateandforeignbonds 9323.6 2 1868.5 4Municipalsecurities 145.4 3 874.3 9131.0 3Treasurysecurities 358.4 1816.6 4342.2 105.7 2Creditmarketinstruments 11526.8 870.5 1719.4 354.0 4287.7 9323.6 93.5 1633.4 1Totalfinancialassets 871.8 4242.8 7870.9 328.2 2001.4 74.6 4184.4 7873.0 876.0 Closed-endfunds 307.9 1719.4 3981.3 6920.7 837.0 75.4 1413.4 262.7 3851.6 Billions ofdollars;amountsoutstandingendperiod, notseasonallyadjusted 1243.0 871.8 286.8 4342.2 L.122 Closed-EndandExchange-Traded Funds 1120.7 784.8 3981.3 358.4 3329.3 680.1 262.7 2969.9 (1) Open-endinvestmentcompanies; excludesfundingvehiclesforvariableannuities,which areincludedinthelifeinsurancesector(tableL.115). 11 603.2 108.7 102.1 2616.3 12Totalsharesoutstanding (liabilities) 137.5 89.1 11Miscellaneousassets 13 153.3 10Corporateequities 90.7 2678.3 9 2637.4 361.1 9Other loans andadvances 103.0 3 8 Corporateand foreignbonds 2541.9 354.0 13.3 4 7 Municipalsecurities 102.1 2554.0 5 6 Agency- and GSE-backed securities 494.9 6 345.0 2649.6 493.0 93.0 5 Treasury securities 11.0 1611.8 4 Open market paper 494.4 325.6 2506.9 489.1 1572.8 102.1 27.5 2678.3 444.3 3Creditmarket instruments 343.5 1550.9 450.4 102.1 2649.6 10.9 429.4 1562.7 331.4 2Security repurchaseagreements 470.7 2642.5 105.1 1580.9 435.4 16.5 361.1 2755.4 1Totalfinancialassets 544.7 1520.2 154.2 396.9 3258.6 343.5 11.3 513.2 1611.8 169.9 494.9 Billions ofdollars;amounts outstandingendofperiod,notseasonallyadjusted 403.7 1580.9 493.0 13.3 L.121 MutualFunds(1) 1663.6 435.4 402.8 544.7 1673.4 16.5 402.7 543.0 490.5 2070.0 (1) Open-endinvestmentcompanies;excludesfundingvehicles forvariableannuities,whichareincludedinthelifeinsurancesector(tableL.115). 458.9 20.1 479.4 566.6 13Totalsharesoutstanding(liabilities) 14.2 480.0 12Miscellaneousassets 17.9 11Corporateandforeignbonds 10Municipalsecurities 9Agency-andGSE-backedsecurities 8Treasurysecurities 7Openmarketpaper 6Creditmarketinstruments 5Securityrepurchaseagreements 4Timeandsavingsdeposits 3Checkabledepositsandcurrency 2Foreigndeposits 1Totalfinancialassets Billions ofdollars;amountsoutstandingendperiod,notseasonallyadjusted L.120 MoneyMarketMutualFunds(1) Assets in Credit MarketInstruments 0921 0121 032012 2013 2012 2011 2010 2009 16246. 47250. 89253. 17051. 73864. 89210 6809.2 6246.2 5743.8 5611.2 5107.0 5037.8 6809.2 5107.0 4427.2 4762.7 1 4136.2 11526.8 10904.9 10299.5 10087.4 9323.6 9131.0 11526.8 9323.6 7870.9 7873.0 6920.7 1 2678.3 2637.4 2541.9 2554.0 2649.6 2506.9 2678.3 2649.6 2642.5 2755.4 3258.6 7. 2. 4. 2. 1. 1. 2. 4. 4. 2. 1. 7 610.9 5 620.7 641.4 641.0 640.9 646.6 627.5 627.4 638.9 610.5 579.6 610.9 531.3 627.4 641.4 541.2 579.6 525.5 456.6 478.8 380.5 258.0 10 308.3 8 7 305.1 488.2 352.1 309.6 466.5 357.9 312.5 449.0 356.6 336.7 470.5 351.1 320.1 457.8 340.8 308.3 456.3 319.4 336.7 488.2 352.1 357.3 457.8 340.8 386.7 443.3 354.2 440.1 335.4 394.2 406.4 510.5 7. 5. 6. 03312. 07119. 15917. 21512. 13 1427.3 1291.5 1172.2 1195.9 8 1093.3 1670.6 1047.1 1537.3 1427.3 1413.7 1093.3 1434.0 863.8 1324.4 854.1 1268.2 1 291.1 670.0 1670.6 1324.4 280.6 1042.6 278.5 986.8 272.1 773.1 257.2 253.3 291.1 257.2 241.3 243.8 229.3 492957-741. 4. 2. 1. 1. 701. 11 17.0 17.0 -15.3 -16.2 4 -27.4 106.1 -45.3 104.6 17.0 100.7 -27.4 98.5 5.7 77.5 99.8 2.9 106.1 14.9 77.5 12 40.0 31.7 66.3 33.8 80.2 31.9 31.5 28.8 25.1 2 31.7 33.7 28.8 36.3 22.7 37.1 23.5 48.7 26.9 43.3 40.2 33.7 43.3 42.9 105.9 97.1 185. 246. 716. 366. 416. 7110 57.1 63.9 64.1 62.8 63.6 4 6 86.1 62.7 117.6 86.1 57.1 110.4 86.8 63.6 108.4 86.2 62.4 108.6 101.3 85.7 51.0 101.1 84.5 41.8 117.6 86.1 101.3 85.7 96.5 82.5 97.4 81.5 88.1 81.2 . . . 231. 131. 301. 151. 11 11.4 11.5 12.5 13.0 3 12.3 5.8 11.3 5.8 11.4 5.8 12.3 5.7 8.6 5.2 7.6 5.2 5.9 5.8 5.2 4.8 5.1 4.4 3Q 1Q 3Q4 Q3 Q2 Q1 Q4 Q3 Z.1, March6,2014 2013 83

Levels Bank and MMMF lending to Broker Dealers / GDP

8%#

7%#

6%#

5%# Bank# Bank#and#MMMF# 4%#

3%#

2%#

1%#

0%# Mar/52# Mar/55# Mar/67# Mar/70# Mar/73# Mar/76# Mar/79# Mar/82# Mar/85# Mar/97# Mar/00# Mar/03# Mar/06# Mar/09# Mar/12# Mar/58# Mar/61# Mar/64# Mar/88# Mar/91# Mar/94# Banks net Dealers Broker net

Levels rprycsat nuac opne ...... 8 2.2 1.8 1.4 1.1 6 0.8 4 288.4 438.4 0.6 5 305.5 467.0 150.1 285.0 2.2 462.8 161.5 297.8 490.0 177.9 0.8 296.9 499.6 192.6 293.7 0.4 563.1 212.4 288.4 438.4 1.5 278.0 296.9 499.6 150.1 280.7 0.6 619.8 212.4 232.4 694.7 355.0 177.8 859.0 462.3 681.3 8Property-casualtyinsurancecompanies 7Creditunions(net) 6ForeignbankingofficesinU.S.(net) 5U.S.-chartereddepositoryinstitutions(net) 4Privatedepositoryinstitutions(net) 3Monetaryauthority 2Restoftheworld 1Totalliabilities Billions ofdollars;amountsoutstandingendperiod,notseasonallyadjusted L.207 FederalFundsandSecurityRepurchaseAgreements 94 8 Dsrpny-nloae ses529439273138-411381382. 92-10-4128 -54.1 -61.0 22 3.4 -9.2 25 3.3 22.3 23 155.9 19 493.0 1.8 103.8 133.4 3.3 489.1 133.8 151.3 1.7 450.4 3.5 -54.1 193.6 470.7 15 1.6 150.8 3.5 103.8 9.2 544.7 174.9 297.3 1.8 513.2 3.5 13.2 16 155.9 413.9 493.0 111.6 1.8 10 9.3 3.4 150.8 522.9 0.0 544.7 111.8 1.8 112.3 9.9 3.5 490.5 112.4 0.0 151.2 1.8 479.4 111.1 10.3 3.6 123.3 0.0 480.0 110.7 1.8 11.2 3.4 0.2 114.4 9.2 1.7 111.6 3.0 0.0 110.7 28Discrepancy--unallocatedassets 10.3 3.8 0.0 117.6 27Fundingcorporations 12.6 26Holdingcompanies 4.5 124.2 25Government-sponsoredenterprises 0.0 12.1 125.5 24Mutualfunds 0.0 7.9 23Moneymarketmutualfunds 22Stateandlocalgovt.retirementfunds 0.4 21Privatepensionfunds 20Lifeinsurancecompanies 1.3 19Property-casualtyinsurancecompanies 1.2 18Monetaryauthority 17Restoftheworld 16Stateandlocalgovernments 15Nonfinancialcorporatebusiness 14Totalassets 13Holdingcompanies 12Brokersanddealers(net) 11REITs 10Government-sponsoredenterprises 9Lifeinsurancecompanies Z.1, March6,2014 0921 0121 032012 2013 2012 2011 2010 2009 50511. 63517. 92814. 83014. 84012. 92814 1972.8 1920.7 1864.0 1942.3 1873.0 1843.7 1972.8 1873.0 1673.5 1611.3 1520.5 1 1918.7 1859.8 1854.8 1964.7 1976.8 1977.4 1918.7 1976.8 1970.8 2025.2 2043.4 5. 3. 0. 6. 5. 8. 6. 0. 2. 5. 5. 24 358.4 354.0 328.2 307.9 262.7 286.8 17 822.0 358.4 794.5 262.7 791.8 108.7 821.1 137.5 12 765.7 135.3 153.3 726.0 143.4 822.0 183.1 765.7 203.6 763.1 189.2 635.8 169.2 561.5 135.3 2 189.2 733.1 215.3 792.6 404.7 790.1 470.9 830.1 847.7 818.0 733.1 847.7 808.0 731.8 530.5 825. 051. . . 151. . 078726 8.7 10.7 7.8 20 6.2 11.3 11.5 6.4 0.4 5.4 8.7 8.7 11.5 8.5 50.5 8.5 50.3 6.2 48.2 9 8.5 12.7 11 281.0 10.1 13.4 284.2 10.9 13.8 308.3 10.2 320.6 13.7 318.7 13.5 3 319.9 315.9 12.7 281.0 157.4 12.7 318.7 95.2 13.5 215.4 105.5 120.5 10.4 107.2 90.4 92.7 10.3 315.9 12.4 107.2 99.9 59.7 77.7 01-. 1. 97-. 86-. 04-. 01-. 7 -0.1 -0.1 -0.2 -0.4 -9.7 -8.6 -0.1 -9.7 -15.9 -0.0 -0.1 ...... 27 0.0 0.0 0.0 21 0.0 2.5 0.1 2.5 18 0.0 0.1 2.6 0.0 0.0 2.6 0.0 0.1 2.6 13 0.0 0.0 0.1 2.8 0.0 0.0 0.1 2.5 0.0 0.0 0.1 2.6 0.0 0.0 2.7 0.0 0.0 2.7 0.0 1.2 2.9 0.0 0.0 0.0 0.0 1.2 0.8 0.6 3Q 1Q 3Q4 Q3 Q2 Q1 Q4 Q3 MMMF GSEs ROW 2013

Two Fund Theorem efcient-frontier.jpg 980×642 pixels 4/3/14, 3:22 PM

http://www.fureyous.com.au/wp-content/uploads/2010/10/efcient-frontier.jpg Page 1 of 1 Treasury Repo Rates Often Exceed T-Bill Rates

6#

4#week#T!Bill#Rate# 5# Treasury#Repo#Rate#

4#

3#

2#

1#

0#

Jul!07# Jul!08# !1#Jan!07# Mar!07# May!07# Sep!07# Nov!07# Jan!08# Mar!08# May!08# Sep!08# Nov!08# At short horizons, Treasuries are risky: Daily returns on iShares 7-10 year Treasury ETF (IEF) 2.0%&

1.5%&

1.0%&

0.5%&

0.0%&

!0.5%& March!07& March!08& March!09& March!10& March!11& March!12& March!13& March!14& !1.0%&

!1.5%&

!2.0%& A Theory of Repo Haircuts and Rates

• Collateralized borrowing is limited (rationed) by haircut

• Constrains how far out capital market line risk tolerant investor can go

• Repo lender faces credit risk in event of double default

• Collateral falls in value

• Borrower defaults

• Repo terms split the surplus to be shared from high shadow value of borrowing for risk tolerant investor versus high concern about credit risk in lending from risk averse lender

• Repo terms should depend on both the counterparty and the collateral Missing elements from the theory

• A theory of the investment horizon

• Overnight Repo vs. Five year swaps

• A theory of the instruments used

• The market portfolio should be the only risky portfolio repo’d

• Equities vs. Fixed Income

• General Equilibrium General Equilibrium

• Focus on the allocation of consumption

• Allocate aggregate endowment of consumption

• Agents have different utility functions

• Solve a social planning problem

• Lagrange multipliers on the resource constraints correspond to equilibrium state prices for consumption

• What portfolios implement the optimal outcome? A two period model

States:

z Z = z ,z ,... 2 { 1 2 } Probabilities:

⇡(z)

Utilities

i i i i i u (c0)+ u (c1(z))⇡(z) z X

i i i i i max ⌘i u (c0)+ u (c1(z))⇡(z) ci ,ci (z) 0 1 i " z # X X subject to:

Y ci 0 0 i X and, for all z,

Y (z) ci (z) 1 1 i X

(1 ⌫) ↵ (1 ↵) ⌫ ⇧(z,k) = max A(z) (k ,l ) wl l

s(z)

P (z,k)

1 k0(z)=max E [⇧(z0,k0) (1 )k0 s(z),P(z,k)] k0 k0 R |

1 ⇧⇤(z)= E [⇧(z0,k0(z)) (1 )k0 P (z,k)] k0(z) R | 1 States:

z Z = z ,z ,... 2 { 1 2 } Probabilities:

⇡(z)

Utilities

i i i i i A Social uPlanning(c0)+ u (c1(z)) ⇡Problem(z) z X

i i i i i max ⌘i u (c0)+ u (c1(z))⇡(z) ci ,ci (z) 0 1 i " z # X X subject to:

Y ci 0 0 i X and, for all z,

Y (z) ci (z) 1 1 i X

(1 ⌫) ↵ (1 ↵) ⌫ ⇧(z,k) = max A(z) (k ,l ) wl l

s(z)

P (z,k)

1 k0(z)=max E [⇧(z0,k0) (1 )k0 s(z),P(z,k)] k0 k0 R |

1 ⇧⇤(z)= E [⇧(z0,k0(z)) (1 )k0 P (z,k)] k0(z) R | 1 Optimal allocation of consumption

• Equate MRS across states and dates across agents

• With quadratic or negative exponential utility, optimal consumption allocation is linear in aggregate consumption with different slope and intercept depending on agent’s risk aversion

• General Equilibrium version of the Two-Fund Theorem: Risk tolerant investors hold a levered claim on aggregate consumption, risk averse agents hold riskless claim and small exposure to aggregate consumption

• Basic insight should generalize except portfolio implementation may be messier

• Optimal consumption is simple because it is done state-by-state RISK SHARING WITH HETEROGENEOUS RISK AVERSION

ANDREW ATKESON

Agents of type i have utility RISKRISK SHARING SHARING WITH WITH HETEROGENEOUS HETEROGENEOUS↵i ⇢ RISK RISK AVERSION AVERSION ui(ci)= exp( (ci i)) ⇢ ↵i ANDREW ATKESON and marginal utility ANDREW ATKESON ⇢ u0 (c )=exp( (c )) RISKAgents SHARING of type i have WITH utilityi i HETEROGENEOUS↵ i i RISK AVERSION Agents of type i have utility i Given aggregate endowment Y and equal↵i Pareto⇢ weights, the optimal sharing rule ui(ci)= ↵i exp( ⇢ (ci i)) GE Exampletu (c )=ANDREW ⇢Linearexp( ATKESON↵i (c Sharing)) at any date t and history h solvesi i two ⇢ sets of↵ equations.i i The first is that marginal utilitiesand should marginal be utility equated across agents, i.e. i and marginal utility Rule⇢ ⇢ ui0 (ci)=exp( ⇢ (ci ⇢i)) Agents of type i haveexp( utilityu(0c(ci )=exp(i)) = exp(↵i(c ())cj j)) ↵ i i ↵ i ↵ i Given aggregate endowmenti Y and↵ equali Paretoi ⇢ weights,j the optimal sharing rule Given aggregate endowmentui(ct iY)=and equalexp( Pareto(c weights,i i)) the optimal sharing rule for allat types any datei andt andj. history The secondh solves is thetwo⇢ sets resource of↵ equations. constraint. The first With is that number marginal of each at any date t and history ht solves two sets of equations.i The first is that marginal type nutilitiesi,thisis should be equated across agents, i.e. andutilities marginal should utility be equated across agents, i.e. ⇢ ⇢ ⇢ exp( ⇢ (ci i))nic =i exp(= Y ⇢ (cj j)) ui0↵(ici)=exp( (ci ↵j i)) exp( (ci ii)) = exp(↵i (cj j)) for all types i and j. The second↵i X is the resource↵ constraint.j With number of each TakingGiven logs aggregatei of the endowment condition thatY and marginal equal Pareto utilities weights, are equated the optimal gives sharing rule atfor anytype all date typesn ,thisist andi and historyj. Theht secondsolves is two the sets resource of equations. constraint. The With first number is that of marginal each type ni,thisis ⇢ ⇢ utilities should be equated across(ci agents,i)=nici i.e.=(Ycj j) ↵i i ↵j ⇢ Xnici = Y ⇢ Taking logs of theexp( condition( thatc marginali )) = exp( utilities are(c equated )) gives so we have a linear optimal sharingi X rulei j j Taking logs of the condition↵i that⇢ marginal⇢ utilities↵j are equated gives ↵(cii i)= (cj j) for all types i and j. Theci = second⇢↵i is the(Y resource↵⇢j nk constraint.k)+i With number of each (cnk↵k )= (c ) i k i i k j j typeson we,thisis have a linear optimal↵ sharingi rule ↵Xj ↵ Noteso that we have if we a linear write optimal a multiP sharing periodi rule modelnici = withY stochastic process for aggregate t t ci = (Y nkk)+i nk↵k output Y (h )whereh is the historyk↵i i of eventsk from date 0 through date t, we can ci = X(Y X nkk)+i priceTaking assets logs under of the this condition optimal that sharingn marginalk↵k rule utilities using any are agents’ equated marginal gives utilities Note that if we write a multiP periodk model withk stochastic process for aggregate output Y (ht)whereht is thet ⇢ history of events⇢Xt from date 0 through date t, we can Note that if we writeU 0(Y a( multih )) =( periodci exp(i model)=⇢(Y ( withh(c)j stochasticj) nkk)) process for aggregate price assets under this optimal↵P sharing rule↵ using any agents’ marginal utilities output Y (ht)whereht is thei history of eventsj from datek 0 through date t, we can t t X soprice we have assets a linear under optimal thisU optimal0(Y ( sharingh )) sharing = exp( rule rule⇢(Y ( usingh ) anyn agents’kk)) marginal utilities Thus, for example, the interest rate in this economy in period t is t ↵i t k U 0(Y (h )) = exp( ⇢(Y (h )t X n )) Thus, for example, thecti interest= 1 rate in(YU this0(Y economy(h ,znkt+1k)+ in)) periodkik t ist (1 + r(h )) = nk↵k ⌘(z h ) k k t k t+1 U 0(Y t(h ))X | t 1 zt+1 U 0(YX(h ,zt+1)) t Thus, for example, the interest rate in this economy in period t is Note that if we write(1 a + multir(h ))P period= X model witht stochastic⌘(zt+1 h process) for aggregate t t t U 0(Y (h )) | t where ⌘(z h )istheprobabilityofstatezt+1 z t conditional on history h . output Yt+1(h )whereh is thet history1 X ofU events0(Yt(+1h from,zt+1)) date 0 throught date t, we can | t (1 + r(h )) = t ⌘(zt+1 h ) t pricewhere assets⌘( underzt+1 h )istheprobabilityofstate this optimal sharing ruleUz0(t using+1Y (conditionalh )) any agents’ on| history marginalh . utilities Date: June 2, 2014.| zt+1 t X t Date: June 2,t 2014.U 0(Y (h )) = exp( 1⇢(Y (h ) n )) t where ⌘(zt+1 h )istheprobabilityofstatezt+1 conditionalk k on history h . | 1 Xk Thus,Date for: June example, 2, 2014. the interest rate in this economy in period t is 1 t t 1 U 0(Y (h ,zt+1)) t (1 + r(h )) = ⌘(z h ) U (Y (ht)) t+1| z 0 Xt+1 where ⌘(z ht)istheprobabilityofstatez conditional on history ht. t+1| t+1 Date: June 2, 2014. 1 2 ANDREW ATKESON 2 ANDREW ATKESON

NoteNote that that this this economy economy has has the the property property that that all all assets assets are are priced priced by by a a repre- repre- sentativesentative agent agent whose whose marginal marginal utilities utilities depends on on the the distribution distribution of of types types in in the population through the parameter nkk. If we assume that k = for all the population through the parameter k nkk. If we assume that k = for all k, then asset pricing is independent of thek distribution of types in the economy. k, then asset pricing is independent of theP distribution of types in the economy. WeWe can can decentralize decentralize the the optimal optimal allocation allocationP in in this this economy economy with with the the following following portfolios.portfolios. Let Let us us presume presume the the existence existence of two two funds. funds. The The first first is is a a riskless riskless fund fund thatthat pays pays 1 1 unit unit of of consumption consumption in in every every date date and and state. state. If If we we have have many many time time Implement with Constant Portfolios of periods,periods, we we can can call call this this a a consol. consol. Let Let Bii denotedenote agent agentii0s0sholdingholding of of this this fund. fund. TheThe second second is is a a risky risky fundConsol fund that that Bond pays pays and dividend dividend Share of AggregateYY((hhtt)inperiod)inperiod ttandand history historyhth. t. Endowment LetLetSiSdenotei denote agent agenti0is0sholdingholding of of this this fund. fund. To To implement implement the the optimal optimal allocation allocation ofof consumption, consumption, we we can can have have agents agents hold hold ↵ii BBii ==ii nnkkkk nk↵k k nk↵k k XXk and and PP ↵ S = ↵ii Sii = nk↵k k nk↵k NoticeNotice here here that that no no trading trading is is necessary necessary over over time. time. The The optimal optimal allocation allocation is is P implementedimplemented with with fixed fixed portfolios. portfolios.But what about credit risk? InIn this this environment, environment, one one can can construct construct asset asset prices prices for for the the consol consol bond bond and and for for thethe share share in in the the standard standard manner: manner: 1 t k t k U 0(Y (h t,hk)) t k t 1 U 0(Y (h ,h )) VB(ht )=1+ k t ⌘(h t,h kh )t VB(h )=1+ U (Y (h )) ⌘(h ,h| h ) k=1 U0(Y (ht)) | kX=1 0 1X t k t t k U 0(Y (h ,h )) t k t k t V (h )=Y (h )+ 1 U (Y (ht,hk))Y (h ,h )⌘(h ,h h ) S t t k U0 (Y (ht)) t k t |k t VS(h )=Y (h )+ k=1 0 t Y (h ,h )⌘(h ,h h ) X U 0(Y (h )) | where ⌘(ht,hk ht)istheprobabilityofhistoryk=1 ht,hk being realized in period t + k t k t X t k whereconditional⌘(h ,h onh| history)istheprobabilityofhistoryht having been realizedh in,h periodbeingt. realized In this in environment, period t + k | t conditionalone can price on any history cashh flowshaving similarly been in realized the standard in period manner.t. In this environment, oneNotice can price here any that cash we flows have the similarly riskless in asset the standard in zero net manner. supply while the shares ofNotice the risky here asset that add we have up to the one. riskless This is asset possible in zero because net supply agents while have unlimited the shares ofliability. the risky More asset specifically, add up to there one. are This no bounds is possible on individual because agents agents’ have consumption unlimited liability.that prevent More a specifically, social planner there from are no allocating bounds gains on individual and losses agents’ in the consumption aggregate thatendowment prevent to a social risk tolerant planner agents. from allocating gains and losses in the aggregate endowmentIf there to is a risk lower tolerant bound agents.Y on the support of Y (ht), we could also create a risklessIf there asset is a with lower real bound backing:Y on a consolthe support that pays of YY(h.t (Note), we couldhere that also it create is not a risklesspossible asset to create with real a riskless backing: government a consol bond that in pays thisY environment. (Note here in that positive it is net not possiblesupply to even create with a lump-sum riskless government taxation because bond it in is this not environment possible to shift in positive aggregate net supplyendowment even with across lump-sum states and taxation dates. A because lower bound it is on not the possible support to of shift the aggregate aggregate endowmentendowment across is required states for and such dates. a riskless A lower asset bound to exist on the in supportpositive net of the supply.) aggregate endowmentLet Di denote is required agent’s for holdings such a riskless of that consol asset to with exist real in backing. positive Let net the supply.) shares now be claims to a dividend Y (ht) Y . Then, we can implement the optimal Let Di denote agent’s holdings of that consol with real backing. Let the shares now be claims to a dividend Y (ht) Y . Then, we can implement the optimal Bounds on Consumption

• Optimal allocation with linear consumption sharing rules has negative consumption for risk tolerant agents in bad aggregate states

• If planner faces lower bounds on consumption (and finite marginal utility at those bounds), these bounds will bind for risk tolerant agents in bad aggregate states.

• In optimal allocation, further downside aggregate consumption risk is pushed onto risk averse agents Implications for Repo/Financial Crises

• Use standard Lucas-tree logic to price any asset given optimal allocation of consumption and Lagrange multipliers on state-by-state resource constraints.

• Interpret agent’s hitting the lower bound on consumption as default (refusing to take further losses as aggregate consumption falls)

• Repo failure: double default of levered (risk tolerant agents) and fall in value of claim on aggregate consumption perfectly correlated

• Financial Crisis: Optimal allocation has perfectly correlated default across all risk tolerant agents at once when aggregate consumption falls

• Shift further losses in aggregate consumption onto risk averse agents

• Repo looks safe until it isn’t Research Directions

• How do broker dealers fit into the growth model framework?

• What is the appropriate size of broker-dealer balance sheets?

• What would be lost (socially) if we dramatically reduced their balance sheets by regulation?

• Are broker-dealer liabilities the right asset for “banks” to hold?

• Chari-Phelan/Farhi-Golosov-Tsyvinski on tradable assets in Diamond Dybvig