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Federal Reserve Bank of New York Staff Reports Shadow Banking Zoltan Pozsar Tobias Adrian Adam Ashcraft Hayley Boesky Staff Report No. 458 July 2010 Revised February 2012 FRBNY Staff REPORTS This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessar- ily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Shadow Banking Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky Federal Reserve Bank of New York Staff Reports, no. 458 July 2010: revised February 2012 JEL classification: G20, G28, G01 Abstract The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation. Within the market-based financial system, “shadow banks” have served a critical role. Shadow banks are financial intermediaries that con- duct maturity, credit, and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, structured investment vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders, limited-purpose finance companies (LPFCs), and the government-sponsored enterprises (GSEs). Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system. Our de- scription and taxonomy of shadow bank entities and shadow bank activities are accom- panied by “shadow banking maps” that schematically represent the funding flows of the shadow banking system. Key words: shadow banking, financial intermediation Adrian, Ashcraft: Federal Reserve Bank of New York. Pozsar: International Monetary Fund. Boesky: Bank of America Merrill Lynch. Address correspondence to Tobias Adrian (e-mail: [email protected]). The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of NewYork or the Federal Reserve System. ` The Shadow Banking System Conceptualized, designed and created by Zoltan Pozsar ([email protected]) The Federal Reserve Bank of New York, November, 2009 The Traditional Banking System Short-Term Funding Short- to Long-Term Cash Ultimate Borrowers Depositors Ultimate Creditors Deposits Money Market "Portfolios" Checking Checking Short- Accounts Account Loans Deposits Equity Term MMDAs Households, Businesses CDs Savings Households, Businesses, Governments Commercial Banks Debt Funding CDs and the Rest of the World Borrowers Loans Dollar (Short and Long-Term Deposits Assets Assets Loans Loans Deposits Equity Funding Long-Term Investments Bonds Real Money Accounts* Equity Equity Bank Equity Equity Portfolios Bank Bank Client Bank Term The Traditional Banking System System Banking Traditional The Loans Traditional Banks' Lending Process Lending Banks' Traditional Equity Equity Funds Equity Savings Equity Funding ("Originate-to-Hold-to-Maturity-and-Fund-with-Deposits") *Asset Managers, Insurance Companies and Pension Funds Discount Window Agency Debt Purchases Agency MBS Purchases Agency Debt Purchases Loan Agency Agency Agency Reserves Reserves Reserves Reserves ` Collateral Debt MBS Debt 11/25/2008 11/25/2008 11/25/2008 Deposit Insurance (FDIC) European Sovereign and GSEs, DoE, SBA Federal Government Quasi-Sovereign States Temporary PBGC FDIC Federal Government MMMF Guarantee No No No No Implicit Implicit Implicit MMMF Insurance Implicit Deposit No Explicit Explicit Explicit Explicit Insurance Implicit Insurance Insurance Insurance Insurance Premia Insurance Insurance Explicit Fees Fees Fees Fees Premia Insurance Fees (Tail Risk Absorption) Risk (Tail (Tail Risk Absorption) (Tail Risk Equity Repositories Risk Public 9/18/2008 Public Risk Repositories Risk Public *Funded by UST's $50 billion Public Credit Transformation Transformation Credit Public Exchange Stabilization Fund Deposit Insurance Liability Insurance Credit Insurance Liability Insurance Liability Insurance Insurance The "Cash" Shadow Banking System (FDIC) (Federal Government) (GSEs, DoE, SBA) (Federal Government) (EU Government) Guarantees Catalogue:, Step (7): Wholesale Funding Step (1): Loan Origination Step (2): Loan Warehousing Step (3): ABS Issuance Step (4): ABS Warehousing Step (5): ABS CDO Issuance Step (6): ABS "Intermediation" Shadow Bank Liabilities (Shadow Bank "Depositors") Off -Balance Sheet On -Balance Sheet ABS Intermediation ABS Intermediation Short-Term Debt Instruments Fannie and Freddie* CMOs Regulated Money Market Unregulated Money Market Direct Money Market Investors Ultimate Borrowers Agency MBS (Time-Tranched Agency MBS) Agency Discount Notes Intermediaries Intermediaries Corporate Treasurers Ultimate Creditors Agency A1 TBA Agency CMO Loans Agency Loans* Pass- CP Market Through MBS Tranches Bills $1 NAV ABS ABCP s Shares *Conforming mortgages RRs FH LBs Fannie and Freddie Federal Government Model) Cash "Plus" Funds Other* Discount FFELP ABS (Retained Portfolios) Liquidity Puts A1 *ARS, MMMFs Notes A1 Agency Discount ARSs CP Munis AAA MBS Notes Distribute TOBs ABCP $1 NAV Loans Agency Loans* AA-BBB Private Agency or BDP Shares Debt ABS Equity ABS Debt VRDOs RRs Equity *Conforming student loans Sheet Off-Balance 2a-7 MMMFs Other* Bank Treasurers FHLBs A1 *ARS, MMMFs, as well as A1 SBA ABS (Retained Portfolios) A1 (AAA) ABS Tranches CP MTNs and term ABS CP A1 Agency Discount ABCP $1 NAV ABCP $1 NAV (Public Originate-to- (Public AAA MBS Notes Process Intermediation Credit GSEs' The BDP Shares BDP Shares Loans* Loans A1 AA-BBB Private Agency RRs RRs Short-Term Savings Equity ABS Debt System Banking Shadow Government-Sponsored The Other* Enhanced Cash Funds Other* *Conforming SBA loans Sheet Off-Balance *TOBs and VRDOs A1 *ARS, MMMFs Money Market Portfolios CP Direct Short- ABCP $1 NAV Investmen Term BDP Shares $1 NAV Savings RRs Shares "Prime" Homeowners Commercial Bank* Subprime, RMBS, CMBS Trading Books SIV, SIV-Lite CP Other* LGIPs Wholesale Funding Wholesale Dollar Single-Seller Conduit A1 AAA (Short-Term Funding) Offshore (non-2a-7) MMMFs *ARS, MMMFs, as well as A1 CP 1st Lien Loans Deposits AAA AA-BBB A1 MTNs and term ABS CP Home Loans AA-BBB Repos Loans CP ABCP AA-BBB LTD MTNs CP ABCP $1 NAV Loans ABCP Equity Repo Equity High-Grade CDOs Supers CNs* ABCP $1 NAV BDP Shares Securities LTD Haircuts Supers *Capital Notes Sheet Off-Balance BDP Shares RRs Households Equity O/C Multi-Seller Conduit* Broker-Dealer* High-Yield CLOs AAA Asset Manager* RRs Ultra-Short Bond Funds Other* Households and Nonprofits AA-A Subprime Homeowners *FHC affiliate (Warehouse and Term) (LBO Loans) Repo Conduits AA-BBB Arbitrage Conduit ABCP Other* A1 *MMMFs A1 Equity *TOBs and VRDOs CP Structuring AAA Loans Savings: Loans 1st Lien AAA Reverse ABCP $1 NAV Assets Home Loans ABCP and Loans ABCP ABCP ABCP Excess "Equity" AA-BBB Repos* Mezzanine CDOs BDP Shares Syndication AA-BBB ABS Cash 2nd Lien Equity Supers RRs Equity Finance Company* O/C O/C AAA O/C Sheet Off-Balance Other* Sweep Accounts BBB CP Single-Seller Conduit *FHC affiliated *FHC affiliate Consumer ABS AA-BBB *BHC affiliate *ARS, MMMFs, as well as A1 Consumers ABCP (Credit Card ABS) Hybrid Conduits Equity Liquidity Puts* BDPs MTNs and term ABS CP BDP A1 ABCP $1 NAV Goods Loans Loans ABCP Long- Short- Process Intermediation Credit FHCs' AAA BDP Shares & Loans MTNs Loans AA-BBB ABCP Term Term Loans BDPs AA-BBB RRs Services Munis Munis Equity O/C Equity Model) Other* Nonfinancial Corporates *FHC affiliate O/C *ARSs, TOBs, VRDOs Sheet Off-Balance *ARS, MMMFs Savings: Distribute Excess "Equity" Cash Businesses Europe an Banks Federal Reserve SIV DW […] Invest- C&I AAA TAF CP Euro ments Loans AA-BBB Mezz FX Swaps Deposits Originate-to- (Private LTD MTNs ABS TSLF The "Internal" Shadow Banking SystemThe Shadow "Internal" Tri-Party Repo System Supers CNs* Mezz Federal, State TSLF Nonfinancial Businesses Multi-Seller Conduit* Hybrid Conduits *Capital Notes Sheet Off-Balance CDO Equity Tri-Party Clearing Banks* and Local Governments PDCF Businesses (Warehouse and Term) (ABS Warehouse Conduits) CPFF Loans TALF Cash lending Savings: CRE Reverse ABS AMLF Reserves Assets CRE Loans ABCP AA-BBB ABCP for Excess "Equity" Loans Repos Collateral MMIFF Bonds securities collateral Cash ML, LLC Equity O/C O/C ML II, LLC Europe an Banks (Overnight Funding) Wholesale Funding Wholesale Private Equity *European bank affiliated Arbitrage Conduit *BoNY and JP Morgan Chase ML III, LLC […] Portfolio Companies LSAPs AAA Euro Mezz ABCP Deposits OMO LBO ABS Firms AA-BBB Collatera Loans Mezz Activites Banking Shadow Banks' European RoW l O/C Sheet Off-Balance CDO Equity (Foreign Central Banks) Equity Savings: Local FX Currency Reserves Medium-Term Instruments Agent Securities Lending Federal Government RMBS Finance Company* (1st lien, private label) Credit Hedge Fund* MTNs Cash Reinvestment Accounts Tax Treasury CP Single-Seller Conduit A1 A1 Securities Lending* AAA Loans Revenues Bonds ABCP AAA Private CP Loans Repos BDP AA-BBB MTNs ABCP Cash Cash Securities Loans Loans ABCP AA-BBB ABS Equity High-Grade CDOs BDP Collateral Collateral Lent RoW MTNs Governments Supers *Broker-dealer affiliate Sheet Off-Balance Asset Manager, RRs (Sovereign Wealth Funds) State Governments Equity O/C Broker-Dealer*
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