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Shadow Banking in Europe

Shadow Banking in Europe

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An assessment of the shadow banking sector in Europe

Antoine Bouveret
1

Very preliminary draft First version: 12 May 2011 This version: 6 July 2011 Abstract We provide an estimate of the size of the shadow banking sector in Europe. We compare it to the shadow banking sector in the U.S. and discuss potential extensions and open issues related to data availability as well as the inclusion of aspects of hedge funds activities and exchange-traded funds. According to our estimates, the shadow banking sector in Europe amounts to around USD 13 trillion in 2010Q4 (EUR 9500) and USD 15.8 trillion in the U.S. This is the equivalent of 30% of the banking sector liabilities in Europe and 130% in the U.S. Beyond data uncertainties for Europe, the difference with the U.S. can be accounted for by a smaller role played by securitisation in Europe and a more prominent role played by banks in the European financial system. Finally, while the U.S shadow banking sector has experienced a 20% decline since 2008Q1, the European shadow banking sector has remained broadly stable. Keywords: shadow banking system, securitisation, money market funds, commercial paper, securities lending JEL Codes: G01, G20, G21.

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antoine.bouveret@ofce.sciences-po.fr. The author thanks Oliver Burkart and Ouarda Merrouche for useful comments. This paper presents preliminary findings. Any error or omissions are the responsibility of the author.

Electronic copy available at: http://ssrn.com/abstract=2027007

Table of Contents
Introduction ............................................................................................................................................ 4 I. What is the shadow banking sector? .............................................................................................. 6 I.1 A definition of the shadow banking sector .................................................................................... 6 I.2 The development of the shadow banking sector in the last decade and its collapse during the financial crisis ...................................................................................................................................... 7 I.3 The components of the shadow banking system .......................................................................... 9 I.4 Further issues ............................................................................................................................... 10 Should exchange traded funds be part of the shadow banking sector? ...................................... 10 Should Hedge Funds be included in the shadow banking sector? ............................................... 11 II. Assessing the size of the shadow banking sector in the United States ........................................ 13

III. Assessing the size of the shadow banking sector in Europe ......................................................... 15 III.1 Money market funds in Europe ................................................................................................. 15 III.2 Commercial paper in Europe ..................................................................................................... 15 III.3 ABS issuers ................................................................................................................................. 16 III.4 The European Repo market ....................................................................................................... 17 III.5 Securities lending ....................................................................................................................... 18 III.6 An estimation of the size of the shadow banking sector in Europe .......................................... 18 IV. A comparison of the U.S. and European shadow banking sector ................................................. 20 IV.1 Structure of the shadow banking sector in the U.S. and in Europe .......................................... 20 IV.2. Why has the European shadow banking sector not collapsed? ............................................... 22 Conclusion ............................................................................................................................................. 26 References ............................................................................................................................................ 27 Appendix 1: data used for assessing the size of the US shadow banking sector.................................. 30 Appendix 2: data used for assessing the size of the European shadow banking sector ...................... 30

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Electronic copy available at: http://ssrn.com/abstract=2027007

Chart 1: Credit Hedge funds.................................................................................................................. 12 Chart 2: US shadow banking sector ...................................................................................................... 14 Chart 3: Money market funds in Europe .............................................................................................. 15 Chart 4: Commercial paper in Europe................................................................................................... 16 Chart 5: ABS outstanding and OFIs liabilities ........................................................................................ 17 Chart 6: The European repo market ..................................................................................................... 18 Chart 8: Shadow banking sector in Europe ........................................................................................... 19 Chart 9: Size of the shadow banking sector .......................................................................................... 22 Chart 10: The ABCP market .................................................................................................................. 23 Chart 11: Evolution of the CP market ................................................................................................... 24 Chart 12: ABS issuance in Europe ......................................................................................................... 25 Chart 13: ABS used as collateral for ECB refinancing operations ......................................................... 25

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Introduction
The financial crisis started in August 2007 with a run on the Asset-Backed Commercial Paper (ABCP) that quickly spread to the interbank market. ABCP issuers were unable to refinance their long term assets (such as mortgage loans) with short term paper as investors were concerned about the quality of the underlying assets due to the collapse of the U.S. housing market. The financial turbulence expanded to other financial markets such as the ones for repurchase agreements (repo), asset-backed securities (ABS) and mortgage-backed securities, leading eventually to the collapse of Lehman Brothers in September 2008. It is only after the Federal Reserve Board and other government agencies implemented a whole set of liquidity facilities available to entities outside of the banking sector that the run started to wane2. As emphasized by Pozsar et al. (2010): “The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks”. While the financial crisis has been the result of a combination of factors3 that include inadequate regulation (Levine (2010)), search for yields and global imbalances (Bernanke (2011)), the ‘shadow banking sector’ has also played a significant role. In particular, by performing bank-like activities such as credit intermediation, liquidity and maturity transformation, it significantly contributed to the credit bubble. This enabled financial companies to grant loans extensively as they were able to sell them to investors such as ABS issuers, through securitization. Given that those loans were no longer on the balance sheet of financial companies, the latter were not incentivized to monitor the borrowers, contributing to the expansion of the subprime market. Those risks were amplified by the development of complex products (such as CDO and CDO2) that repackaged these loans, the general underestimation of risks, and the strong reliance on credit rating agencies for assessing the credit risk of structured products. When the U.S housing market collapsed and borrowers were no longer able to repay their loans, the whole shadow banking system experienced a run that eventually lead to the financial crisis (Gorton (2007), Adrian and Shin (2009), Brunnermeier (2009), Gorton (2009) and Adrian and Shin (2010), Acharya et al. (2010)). This significant role played by the shadow banking sector in the U.S. has been emphasized by Adrian and Shin (2009): they estimate that market-based holdings of home mortgages amounted to around USD 7 trillion in 2008Q1, while bank-based holdings added up to a total of around 3.2 trillion. A particular feature of the U.S. shadow banking system is that, during the financial crisis, its decline was dramatic: total liabilities have been reduced by USD 5000 billion between 2008Q1 and 2010Q4, according to Pozsar et al. (2010). While performing bank-like activities, shadow banks did not have access to liquidity backstops such as central bank lending facilities and deposit guarantees, and they were therefore greatly exposed to runs. The high reliance of shadow banks on short term funding markets increased the vulnerability of the financial system as a whole. Moreover, before the crisis, there was no general understanding of the role played by shadow banks: “These risks [linked to shadow banks] grew rapidly in the period before the crisis, in part because the regulators--like most financial firms and investors--did not fully

2 3

See Cecchetti (2009) for an overview of the Federal Reserve’s response to the crisis. See Acharya et al. (2009) for a discussion of the causes of the crisis. 4

understand or appreciate them” (Bernanke (2010))4. As a result, during the financial crisis, policy responses by central banks, and later on by Treasuries, were partly inadequate, at least until Lehman Brothers’ collapse in September 2008, due in particular to the lack of an overall view of the shadow banking sector. For example, in August 2007, the Federal Reserve’s first response was to reduce the primary credit rate offered to banks using the discount window to cope with the freeze in the interbank market. However, as this facility was only available to banks and not to shadow banks, it was only able to reduce the symptoms rather than cure the disease. Recently, the shadow banking system has been on the top of the policy agenda of the G20 and the Financial Stability Board5. Looking forward, one concern raised by the banking industry (JPMorgan Cazenove (2011)) has been that the new capital requirements under the Basel III framework may incentivize financial institutions to move their activities out of the banking sector, thereby increasing the size and importance of the shadow banking sector. This was also stressed by policy makers: “most authorities have concentrated their action on regulation, not supervision. But introducing more and more complex rules will not do much good: it will merely encourage shadow banking and regulatory arbitrage. “(De La Rosière (2011)). On this basis, it is crucial to assess and monitor the role and the size of the shadow banking system. While several papers have estimated the size of the shadow banking sector in the U.S. (Gorton (2009), Adrian and Shin (2009), Coval et al. (2009), Gorton and Metrick (2011)), to our knowledge, there is no literature on the shadow banking sector in Europe. Therefore, this study aims at starting to fill this gap by providing an estimate of the size of the European shadow banking sector. It also provides a comparison with its U.S. counterpart and discusses possible explanations for the difference between the two systems. In order to provide an assessment, one has to rely on a specific definition of the shadow banking sector. The first attested use of the expression “shadow banking system” seems to have been made at the Federal Reserve of Kansas’s annual symposium in Jackson Hole in August 2007: “ unlike regulated banks, who fund themselves with insured deposits, backstopped by the access to the Fed’s discount window, unregulated shadow banks fund themselves with un-insured commercial paper, which may or may not be backstopped by liquidity lines from real banks. Thus, the shadow banking system is particularly vulnerable to runs” (McCulley (2007)). There is a relative consensus on the main features of the shadow banking system, as outlined in section I below. However, there are open problems such as the inclusion of specific activities of hedge funds or some exchange-traded funds. Another issue is linked to the lack of reliable data on the shadow banking sector, partly because it was precisely out of the scope of regulators, and because it relied on financial innovations such as securitization. Data issues are especially difficult to address for Europe. Unlike the U.S., there is no ‘flow of funds report’ for Europe; therefore several datasets have to be compiled to perform the estimation. Data used in this paper comes from central banks (such as the Bank of England and the
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The BIS (2008, p. 138) makes as similar claim: “Moreover, as evidence has accumulated that the financial system as a whole is no longer functioning effectively, those charged with prudential oversight must also ask themselves what went wrong. How, for example, could a huge shadow banking system emerge without provoking clear statements of official concern? Perhaps, as with processes for internal governance, it is simply that no one saw any pressing need to ask hard questions about the sources of profits when things were going so well.” 5 At the November 2010 Seoul Summit, the G20 agreed to “strengthen regulation and oversight of shadow banking”, (G20 (2010b)) and the FSB released a note on the shadow banking sector in April 2011 (FSB (2011a)). 5

European Central Bank), industry associations (such as EFAMA and AFME), and commercial providers (such as Lipper and Dataexplorers). In order to check the robustness of the results, alternative estimates are provided when different datasets are available. The main results are that, in 2010Q4, the shadow banking sector represented around USD 13 trillion in Europe and USD 15.8 trillion in the U.S.. While it has collapsed in the U.S., it has remained broadly stable in Europe because i) it was less reliant on ABCPs in Europe, and ii) the ECB monetary policy framework has sustained the issuance of ABS during the crisis as issuers were able to use them as collateral for refinancing operations. Section I discusses the definition of the shadow banking sector, section II provides estimates for the U.S., section III describes the issues linked to data availability for Europe, section IV provides an estimate of the shadow banking sector in Europe, section V discusses further issues and section VI concludes.

I.

What is the shadow banking sector?

I.1 A definition of the shadow banking sector
According to Pozsar et al. (2010), the shadow banking sector can be defined as “financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees”. In other words, the shadow banking sector encompasses all financial institutions that perform bank-like activities. As they are not subjected to the same regulatory requirements as banks and also do not have access to public safety nets, they are particularly exposed to runs6. A similar definition has been put forward by Buiter (2008): “The shadow banking sector consists of the many highly leveraged non-deposit-taking institutions that lend long and illiquid and borrow short in markets that are liquid during normal or orderly times but can become very illiquid when markets become disorderly. They are functionally very similar to banks but are barely supervised or regulated. They hold very little capital, are not subject to any meaningful prudential requirements as regards liquidity, leverage or any other feature of their assets and liabilities.” Recently, following the mandate put forward by the G20 at the November 2010 Summit, the FSB has released a note aiming at defining the shadow banking system (FSB (2011a)) which is relatively close to the previous approaches: “the system of credit intermediation that involves entities and activities outside the regular banking system7”. The FSB has also provided a narrower definition whereby the shadow banking system is : “ a system of credit intermediation that involves entities and activities outside the regular banking system, and raises i) systemic risk concerns, in particular by maturity/liquidity transformation, leverage and flawed credit risk transfer, and/or ii) regulatory arbitrage concerns”.

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In particular while banks produce informationally-insensitive debt by creating deposits, shadow banks are supposed to produce informationally-insensitive debt by securitization and repos. However during the financial crisis debt issued by shadow banks became informationaly sensitive (see Gorton (2009) for further details). 7 FSB (2011a), p.2. 6

All the definitions of the shadow banking system presented above are based on a functional approach8 whereby it is the very functions performed by the shadow banking system that are central rather than their institutional type (e.g. hedge funds or SIV). The FSB note nevertheless also provides an institution-based description that includes hedge funds, insurance companies and credit rating agencies (Figure 1).
Figure 1: The shadow banking system according to the FSB

Source: FSB (2011a)

In what follows, we adopt the definition of Poszar et al. (2010).

I.2 The development of the shadow banking sector in the last decade and its collapse during the financial crisis
A range of hypotheses have been proposed in order to explain the development of the shadow banking sector over the last decade: increased competition to banks from nonbanks, decreased regulation and financial innovation. In the U.S., the phasing out of interest rate ceilings in the 1970s and the decreased regulation allowing banks to engage in other financial activities using financial derivatives (such as Credit Default Swaps) and securitization, are considered to have contributed to the rise of the shadow banking sector (see Gorton (2009) and Levine (2010) for a critical assessment of the role played by regulatory agencies in this regard in the U.S.). In particular, securitisation is perceived to have played an important role, as it enabled banks (and other financial institutions granting loans) to move the loans out of their balance sheets, resulting in lower capital charges under the Basel II framework (see Stein (2010)). Securitisation allowed the production of “safe” securities with high credit ratings (such as AAA ABS). The increased use of OTC derivatives in the securitization process led to a sustained demand for high quality collateral so as to reduce counterparty risk (Gorton (2007)). However, no empirical paper has tried to assess which of the hypotheses may explain the rise of the shadow banking sector over the last decade.

8

See “A conceptual framework for analysing the financial system”, in Merton, and Bodie (1995): The Global Financial System: A Functional Perspective, Harvard Business School Press. 7

To our knowledge there has been no paper providing a theoretical model of the development and the collapse of the entire shadow banking sector but rather papers focusing on some particular components. Several theoretical papers have outlined the channels by which credit-based finance can develop and lead to a financial crisis. In particular, three main features have been underlined by the literature: i) how over-indebtness can lead to financial crisis, ii) how leverage can have procyclical effects and iii) how the underestimation of risks can lead to financial crisis. Fisher (1933) outlined in its debt deflation theory of how over-indebtness can lead to debt liquidation and distress selling, resulting in a fall of asset prices and a reduction in output. This could eventually lead to more pessimism, liquidity hoarding and a runs on banks followed by failures and deflation which mechanically increases the value of real debt. Hyman Minsky’s financial instability theory (Minsky (1964) for example) can also be used to analyse the rise and fall of the shadow banking sector. During the “euphoric economy” (Minsky (1986)), both lenders and borrowers are confident that most investments will succeed, leading to the rise of indebtness relative to income and the rise in price of stock market and financial assets. The economy moves from hedge borrowers (whose cash flows from investments are able to repay the interests and the principal) to speculative borrowers (whose cash flows are only able to cover the interests) and finally to Ponzi borrowers (who can only refinance their debt if asset prices keep on increasing)9. Those two theories can be used to account for the build-up of debt over the last 10 years, especially in the U.S. mortgage market. While highly relevant to analyse the financial crisis of 2007-2008, these two theories are however not specific to the shadow banking sector as any credit crisis, even financed exclusively through bank loans, has the potential to be explained by these theories. In particular, the shadow banking sector has been characterized by an extensive use of leverage and securitization. Regarding leverage, Kiyotaki and Moore’s (1997) seminal article provides a theoretical model in which assets can play a dual role: they can be used as a source of revenue and as collateral10. Therefore when the price of the asset collapses, borrowers are not able to pay back the loans and lenders lose financial wealth as the collateralized assets have experienced a price decline. As a consequence, collateralized finance amplifies the business cycle. More recently, Adrian and Shin (2008) put forward a model in which banks manage risks by expanding and contracting their balance sheet, resulting in significant changes in leverage. Under the assumption that investors impose a constant probability of failure to each banks over the cycle (e.g. the Value-at Risk is kept equal to its equity at all times), and that equity is fixed, an increase in risk in the financial system will result in a decline in banks’ balance sheet (deleveraging). Geanakoplos (2009) provides another model for leverage based on change in investors’ sentiments rather than financing constraints as in Adrian and Shin (2008). Geanakoplos (2009) proposed a model in which investors, which are optimistic or pessimistic, use repo markets whereby repo rates and haircuts are determined by the share of optimistic agents; the more optimistic the agents, the lower the haircut and the higher the asset prices. When negatives news arrive, optimistic agents become insolvent as they are not able to pay back the loans and prices collapse leading to a financial crisis. Gennaioli and Shleifer (2011) provide a model that relies upon the underestimation of risks by economic agents. Under the assumption that investors prefer safer securities and neglect tail risks11, the authors show that there is an overSee Keen (1995) for a theoretical model of Minsky’s financial instability hypothesis. More precisely, in Kiyotaki and Moore (1995), durable assets can be used as factors of production or as collateral. 11 More specifically, the authors use the assumption of ‘local thinking’ whereby investors and intermediaries neglect tail downside aggregate risks and only base their actions on the more likely scenarios.
9 10

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issuance of securities as investors buy more debt which they perceive as riskless. As a result, intermediaries pool loans and diversify their idiosyncratic risk to support debt issuance, but they also increase their systematic risk. When the worst scenario occurs, intermediaries are heavily exposed to downside risks as they have sold “riskless” bonds to investors, leading to default and a financial crisis. One limit of Adrian and Shin (2008), Geanakoplos (2009) and Gennaioli and Shleifer (2011) theoretical models is that they rely on specific assumptions: fixed equity for Adrian and Shin (2008), changes in investor’s perceptions in Geanakoplos (2009) and underestimation of risks for Gennaioli and Shleifer (2011). Moreover, the aforementioned articles are not specific to the shadow banking sector but rather specific to the repo market and the securitisation market.

I.3 The components of the shadow banking system
One important feature of the shadow banking sector is a maturity mismatch: most of its funding is relying on short-term instruments (such as commercial paper and repurchase agreements (“repo”), while its assets are of longer maturity12. Therefore, short term instruments are central in the coverage of the shadow banking system. The shadow banking sector can be an important source of funding for the “traditional” banking system, as banks may use repo and commercial paper as a funding source. The shadow banking system can be decomposed into several subcomponents. The securitizationbased shadow credit intermediation involves several instruments13 and institutions that perform bank-like activities as pictured in Figure 2. Loan pools transferred to (or originated by) the shadow banking sector are securitized in the form of ABCP (asset-backed commercial paper) where the ABS structure is not exposed to maturity mismatch. Those ABS can be purchased by other entities and funded through ABCP, implying a “resecuritization process” (Pozsar et al. (2010)), or through other alternatives such as repo (Gorton (2009)). Finally, those instruments are purchased by money market investors (such as money funds and securities lenders).

12

However, some of the components of the shadow banking system may not have such maturity mismatch issues: for example money market funds have short-term liabilities and short term assets. 13 This section presents a very simplified version of shadow credit intermediation; see Pozsar et al. (2010) for a detailed description. 9

Figure 2: simplified securitization-based shadow credit intermediation
Institutions/Vehicles
Assets Loan Liabilities Deposit Bank Credit, maturity and liquidity transformation

Bank-like activities

Assets Loan

Liabilities ABS ABS structure Credit transformation

Assets ABS

Liabilities ABCP SIV Maturity transformation

Assets

Liabilities

ABCP

MMF shares
Money market funds

Maturity and liquidity transformation

Source: Author

Therefore, the instruments used during the securitization process are crucial components of the shadow banking sector and CP, ABCP, repo, securities lending and MMF are all included in the estimate. Moreover, total liabilities of ABS issuers (as well as GSEs liabilities for the U.S.) are also important components of the shadow credit intermediation process14.

I.4 Further issues
This section focuses on two types of instruments that have not been included in the shadow banking sector by the Pozsar et al. (2010): aspects of exchange traded funds and hedge funds activities. Should exchange traded funds be part of the shadow banking sector? Recently, a series of papers by international bodies such as the FSB, the IMF and the BIS15 have underlined the risks linked to exchange-traded-funds (ETFs). In particular, Ramaswamy (2011) explains the consequences of banks using synthetic ETFs16 to obtain cheap funding through collateral practices. Under synthetic replication, a financial intermediary provides the underlying index return to the ETF provider (either through total return swaps or credit-linked notes) and transfers collateral assets to the ETF provider. If the financial intermediary is a parent bank, this bank can fund those assets as very low cost, especially if the securities pledged are illiquid. As result, banks can enter into swap transactions with synthetic ETF sponsor to get a cheap source of funding. In April 2011, assets under management of European synthetic ETFs amounted to USD 147 billion according to Blackrock
Tucker (2010) uses the same framework by including MMF, ABCP, SIV, finance companies and the securities lending and repo markets. 15 See FSB (2011b), IMF (2011) and Ramaswamy (2011). 16 Synthetic ETFs replicate the underlying index by using derivatives instead of owning the physical assets as it is the case for ‘in specie’ (physical) ETFs. Synthetic ETFs can either use the unfunded swap structure, where the ETF sponsor enters into a total return swap with a financial intermediary, receiving the total return on the underlying index (and collateral) and transferring the cash to the counterparty, or the funded swap structure, the ETF sponsor transfer cash to the counterparty and the latter posts collateral into a ring-fenced custodian account to which the ETF sponsor has legal claims but is not the beneficial owner. See Ramaswamy (2011) for further details.
14

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(2011). As the swap transactions can be overcollateralised (especially under the funded swap structure) and haircuts can be applied depending on the jurisdictions, pledged collateral - and therefore the amount of funding available for sponsor banks - can be sizeable. However, as data on collateral pledged, haircuts and counterparty is scarce, synthetic ETFs will not be included in our estimate of the shadow banking sector although they fit the definition used. Should Hedge Funds be included in the shadow banking sector? Under the functional approach taken in this paper, some hedge funds activities may be included in the shadow banking sector as long as they provide leverage, maturity transformation (for example by holding leveraged loans financed via repo), and credit intermediation. However, many hedge funds can be exposed to bank-like “runs” only to a certain extent, as funds cannot be redeemed immediately but only at specific periods, whereas others can stop a priori unrestricted redemptions in exceptional circumstances. During the financial crisis, the Federal Reserve Board enabled institutional investors to use the Term Asset-backed Securities Loan Facility (TALF), with loans amounting to USD 71 billion. In particular, some hedge funds such as FrontPoint and Magnetar borrowed respectively USD 4.1 billion and over USD 1 billion. It is not clear how to interpret this piece of evidence: on the one hand, one could argue that the use of those facilities by hedge funds shows that hedge funds were facing difficulties during the financial crisis such as runlike situations, while, on the other hand, hedge funds may have use the TALF as an opportunity to obtain cheap funding and generate high returns17. Pozsar et al. (2010) claim that credit hedge funds are part of the shadow banking sector as they contribute to credit transformation by taking risks on ABS CDO or by selling CDS. However, they do not include them in their estimate. According to the latest hedge fund survey by the FSA18, the hedge funds asset/liability mismatch has reduced but remains significant, hedge funds implementing fixed income arbitrage continue to have a high leverage19 (despite a significant decrease since April 2010) and to be heavily reliant on repo markets (53% of their funding). As far as credit intermediation is concerned, in the previous FSA hedge fund survey (see Rule (2010) for details), hedge funds exposures were low for structured products, corporate bonds and loans as most hedge funds have largest exposures on equities, CDS and G10 bonds. Another argument to include hedge funds into the shadow banking sector is linked to rehypothecation, whereby collateral pledged by hedge funds to their prime brokers can be used by the latter as collateral. While the practice is regulated in the U.S.20, in the U.K., leverage is not capped21 and Singh and Aitken (2010) have estimated that rehypothecation accounted for up to USD 4000 billion of non-bank funding for U.S banks, using their 10Q reports. To our knowledge such reports are not available in Europe and therefore rehypothecation cannot be included in our estimates.

17

According to the Wall Street Journal (December 2, 2010): “The program generated big returns for investors —as high as 48% in some cases at the height of the crisis, though more commonly in the range of 20% to 40%, analysts say. Toward the end of the TALF program, as yields on many securities fell, returns for borrowers were closer to 10%”. 18 See FSA (2011). 19 Leverage is measured in the survey by the sum of cash and synthetic borrowing divided by net asset value. 20 Regulation T limits the use of rehypothecation by the prime broker to 140% of the debit balance of the fund. For example if an hedge fund has pledged USD 100 in collateral and has a debit balance of 20, resulting in net equity of 80, the prime broker can rehypothecate up to 28 (140% x 20). 21 However the FSA released a consultation paper putting forward contractual limits to rehypothecation, see FSA (2009). 11

According to data collected by Lipper, credit hedge funds’ assets defined as credit focus, fixed income arbitrage and multi-strategy hedge funds amounted to around EUR 70 billion in 2011Q1 and EUR 8 billion for funds located in Europe (Chart 1).
Chart 1: Credit Hedge funds
Total assets of credit hedge funds (Credit focus, Fixed income arbitrage and multi-strategy)
EUR billion 100 90 80 70 60 50 40 30 20 10 0 Total Europe only Europe+offshore centres

source: Lipper TASS

As data on hedge funds is subject to uncertainty and given that the coverage of the industry is partial and hedge funds databases have only small overlap, hedge funds will not be directly included in our estimate. Hedge funds are, nevertheless, indirectly included in our estimation of the shadow banking system as our figures include the repo market. However, synthetic borrowing is not included in our estimation.

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II.

Assessing the size of the shadow banking sector in the United States

Recently, several papers have assessed the size of the shadow banking sector in the U.S. (see Gorton and Metrick (2011), Pozsar et al. (2010), Singh and Aitken (2010)). In particular, Pozsar et al. (2010) assess the size of the shadow banking sector by using figures provide by the Federal Reserve’s flow of funds reports. The size of the shadow banking liabilities is computed as the sum of short term instruments and the liabilities of ABS issuers and Government Sponsored Enterprises (GSEs). It is possible to distinguish between maturity transformation and credit intermediation, following Krieger (2011). More precisely, maturity transformation is proxied by total outstanding open market paper, total repo liabilities22, securities lending and total liabilities of money market funds23, while credit transformation is proxied by the liabilities of ABS issuers and GSEs. Updating24 the estimate provided by Poszar et al. (2010), the shadow banking sector amounted to around USD 5800 billion in 2010Q4 (Table 1).
Table 1: Maturity transformation data

Component
Total outstanding open market paper Total repo liabilities Net securities loaned Total shares outstanding of money market mutual funds Total for maturity transformation
Source: Flow of Funds.

USD value (2010Q4)
1057 (178 for banks) 1213(583 for banks) 733 2755 5758

Credit transformation is estimated at around USD 10 trillion in 2010Q4 (Table 2).
Table 2: Credit transformation data

Component
Total liabilities of ABS issuers Total GSE liabilities Pool securities Total for credit transformation

USD value (2010Q4)
2333* 6561 1166 10060

Source: Flow of Funds * indicates that the figure has been corrected by subtracting CP issued by ABS issuers (USD 123 billion) to avoid double counting

22

For 19 US primary dealers only as other financial institutions are not covered by flow of funds data. Using data from around 1000 bank holding companies, Hördahl and King (2008) suggest that the size of the repo market was around USD 10 trn in 2008Q2. 23 Detailed information on data used is provided in the appendix. 24 We use the same approach as in Pozsar et al. (2010), the main difference is that we exclude commercial paper issued by ABS issuers from the component “ABS issuers liabilities “ as commercial paper is already included in the estimate related to total outstanding commercial paper. Therefore we address the double counting issue. 13

As shown in Chart 2, the shadow banking sector has experienced a substantial decrease during the financial crisis, declining by around USD 5000 billion from its peak in 2008Q1. Each component of the shadow banking sector (with the exception of GSEs) declined by more than 40% between 2008Q1 and 2010Q4.
Chart 2: US shadow banking sector

Size of shadow banking sector liabilities and comparison with banking sector
USD bn
25000

20000

MMF 15000 Open market paper Liabilities ABS 10000

GSE Net securities loaned Bank liabilities

Pool of securities Repo liabilities Shadow banking sector

5000

0

1986Q4

1980Q4

1989Q4

1998Q4

1983Q1

1985Q2

2007Q4

1983Q4

1984Q3

2010Q1

1998Q1

1992Q1

2001Q1

1986Q1

1980Q1

1989Q1

2008Q3

2004Q4

2006Q2

2000Q2

source: Flow of funds

The decline may have been even more substantial if one uses figures for the overall repo market, which peaked at around USD 10 trillion in 2008Q1 according to Hördahl and King (2008)25, and should have therefore also experienced a significant decline. A back-of the envelope calculation implies that if the overall repo market would have experienced the same decline as the primary dealers’ repo market, it would have decreased by around 40%, implying a reduction of USD 6000 billion. Lastly, Singh and Aitken (2010) argue that rehypothecation (i.e. the practice that allows collateral posted by a hedge fund to its prime broker to be used as collateral by the prime broker for its own funding) represents an important source of non-bank funding for US banks, peaking at around USD 4500 billion in December 2007 and declining to around USD 2000 in December 2008. Based on these figures, the decline of the shadow banking sector during the crisis would have been around USD 13 trillion billion, which corresponds to the total liabilities of US commercial banks in 2010Q4.

25

This figure includes double-counting as reverse repo and repo are counted. 14

2009Q2

2003Q2

2002Q3

2005Q3

2010Q4

1987Q3

1992Q4

2001Q4

2004Q1

1990Q3

1988Q2

2007Q1

1991Q2

1982Q2

1993Q3

1994Q2

1995Q4

1995Q1

1996Q3

1999Q3

1997Q2

1981Q3

III.

Assessing the size of the shadow banking sector in Europe

Following the approach taken by Pozsar et al. (2010), and keeping the same categories, we assess the size of the shadow banking sector in Europe. However, as there is no flow of funds report for Europe, we use various data sources for our computations, which implies considerable data uncertainties.

III.1 Money market funds in Europe
Data on money market funds (MMFs) are available either from the industry (European Fund and Asset Management Association, EFAMA), central banks or commercial providers (such as Lipper). According to EFAMA26, in 2010Q4, money market funds amounted to EUR 1182 billion. These figures are close to the quarterly data provided by the ECB (EUR 1132 billion27). Using the Lipper database on European funds, MMF amounted to around EUR 1120 billion in 2010Q4 (Chart 3).
Chart 3: Money market funds in Europe

Total assets of money market funds in Europe
1400 1300 1200 1100 1000 900 ECB data 800 700 EFAMA* Lipper
EUR billion

sources: ECB, EFAMA, Lipper. * Before 2009Q4 Ireland and the Netherlands are excluded, afterwards MMF assets in those two countries are estimated.

III.2 Commercial paper in Europe
Data on commercial paper are available from the ECB via the STEP (Short Term European Paper) programme. Step data covers issuance of commercial paper, euro commercial paper, certificates of deposits and euro certificates of deposits28. In 2010Q4, outstanding amounts were EUR 411.3 billion (Chart 4). Interestingly, contrary to the US CP market, the European CP market did not experience a downturn during 2008Q4, but rather stabilized in early 2009.

26 27

See EFAMA(2011). MMFs are included in Monetary Financial Institutions (MFI) under ECB classifications, along with credit institutions (mostly banks) and central banks as they all contribute to M3. 28 See ECB website for further information: http://www.ecb.europa.eu/stats/money/step/html/index.en.html. 15

Chart 4: Commercial paper in Europe
Size of the CP market in Europe
EUR billion 450 400 350 300 250 200 150 100 50 0 CP Quarterly change (rhs) EUR billion 105 90 75 60 45 30 15 0 -15 -30

source: ECB

III.3 ABS issuers
Balance sheet data on ABS issuers in Europe were not directly available before June 2011. The industry (Association for Financial Markets in Europe, AFME) does provide quarterly reports on issuances and amounts outstanding. According to AFME, ABS balances outstanding were EUR 2090 billion in 2010Q4 (Chart 5). However, AFME does not provide balance sheet data for ABS issuers. Before end-June 2011, the ECB only published data on Other Financial Intermediaries (OFIs) which includes, along with Financial Vehicle Corporations (FVCs), investment funds, financial holdings corporations, securities and derivatives dealers and financial corporations engaged in lending (FCL) that should be excluded from the computation. However, according to the ECB29, most of those institutions do not issue debt securities for funding (investment funds use rather investment funds shares and for securities dealers, debt securities issued amount to less than 5% of liabilities) except for FCL. The only estimates published on the assets of FCL and FVCs referred to 2005Q3, where FCL assets amounted to EUR 684 billion against EUR500 billion for FVC. As shown in the chart below, AFME data on ABS outstanding and ECB data on short term and long term securities on the liability side of OFIs differ. In June 2011, the ECB released balance sheet data on FVCs30. According to ECB data, in 2010Q4, FVCs assets amounted to EUR 2350 billion and were financed up to 85% by debt securities. However, ECB data only covers institutions located in the Euro Area and start in 2009Q4. Therefore we choose to rely only on AFME data for our estimates. One drawback is that there may be double counting as commercial paper used by ABS as funding source will also be included in the estimation of the size of the commercial paper market. However, given that short term securities amounted to EUR 300 billion on the liability side of all OFIs, we believe the bias to be relatively small (or at least less than EUR 300 billion). Using data in FVCs released in June 2011, it appears that AFME and ECB data are relatively close.
29 30

For further information see ECB (2007). See ECB (2011). 16

Chart 5: ABS outstanding and OFIs liabilities

ABS outstanding and OFIs liabilities
EUR billion 3000

2500

2000

1500 AFME 1000 ECB: OFIs liabilities (short and long term securities) ECB FVCs liabilities

500

0 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 sources: ECB, AFME

Another bias linked to ABS data is that, during the crisis, ABS have been massively issued to be used for repurchases operations by the ECB and the BoE. In September 2010, around EUR 500 billion of ABS were held on repo at the ECB according to AFME (2011), accounting for 24% of total collateral posted with the Eurosystem31. Given the different monetary policy framework between the Fed (open market operations) and the ECB (refinancing operations through repurchase agreements), one can argue that the ECB framework may have provided a source of cheap funding for monetary financial institutions holding ABS, as they could be used as collateral for repo with the ECB. While the ECB has changed its eligibility criteria since the onset of the financial crisis (by reducing the eligibility criteria in a first stage and then hardening the criteria at a later stage), it is arguable that repo operations, even if they are done between a bank and a central bank, may have be an indirect source of funding for the shadow banking sector, as detailed in section 5.

III.4 The European Repo market
Data on the repo market are available through the International Capital Market Association (ICMA) half-yearly survey. The latest survey, published in March 2011, has been conducted in December 2010 among 55 financial groups, mainly banks32. In December 2010, the total value of outstanding repo contracts among surveyed institutions was EUR 5908 billion (Chart 6). While the repo market declined during the crisis (by around 30% between 2008Q2 and 2008Q4), it has increased ever since. In contrast, in the U.S., the repo market declined by more than 50% between 2008Q2 and 2010Q4. A potential limitation of the data is that both repos and reverse repos are included in the figure, to obtain a net measure of the repo market, gross figures have to be divided by two33.

31 32

See also section IV.2. See ICMA (2011) for further details. 33 As the share of repo and reverse repo are approximately 50%. 17

Chart 6: The European repo market
Total repo contracts outstanding
EUR billion 8000 7000 6000 5000 4000 3000 2000 1000 0 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4

source: ICMA European repo market survey

III.5 Securities lending
Data on securities lending are scarce in Europe. The Bank of England does provide data for securities lending (as well as repo), but there is no official source for Europe. However, commercial data providers such as Data explorers and Sungard do provide individual data on securities lending. According to RMA, securities lent peaked at around USD 2600 billion in September 2008 (USD 1500 billion in the U.S. and USD 1000 billion in Europe). Given the uncertainties surrounding the data, data on securities lending for Europe will be omitted in this paper.

III.6 An estimation of the size of the shadow banking sector in Europe
Based on the data collected, the shadow banking sector represented around EUR 9540 billion in 2010Q4 (Table 3 and Table 4).
Table 3: Maturity transformation data

Component
Total outstanding open market paper Total repo liabilities Net securities loaned Total shares outstanding of money market mutual funds Total for maturity transformation

EUR value (2010Q4)
411* (X for banks) 5908 N/A 1132 7450

Sources: ECB, ICMA. * indicates that the figure has been corrected by subtracting commercial bank liabilities

18

Table 4: Credit transformation data

Component
Total liabilities of ABS issuers Total for credit transformation
Source: AFME

EUR value (2010Q4)
2090 2090

A particular feature of the European shadow banking sector is that despite the financial crisis, it has kept increasing, peaking at around EUR 10.5 trillion in 2010Q2 (Chart 7).
Chart 7: Shadow banking sector in Europe
Size of the shadow banking sector in Europe
EUR billion 12000 Repo* MMF Total 10000 ABS issuers CP Banks liabilities (rhs) 44000 EUR billion 46000

8000

42000

6000

40000

4000

38000

2000

36000

0

34000

sources: ECB, ICMA, AFME and ESMA calculations * Quarterly data for the repo market between two surveys has been estimated as the average of the two surveys

19

IV.

A comparison of the U.S. and European shadow banking sector

The estimation presented in the previous sections can be used to compare the size and the structure of the shadow banking sector in the U.S and in Europe. Two potential drawbacks relate to data uncertainties, especially for Europe, and to the fact that part of the U.S. shadow banking sector are linked to European banks (for instance German Landesbanken34).

IV.1 Structure of the shadow banking sector in the U.S. and in Europe
Looking at absolute numbers, the size of the shadow banking sectors is roughly similar in 2010Q4, with around USD 16000 billion for the U.S. and 13000 for Europe (Table 5).
Table 5: U.S. and European shadow banking sectors (2010Q4, USD billion)

Component
Total outstanding open market paper Total repo liabilities Net securities loaned Total shares outstanding of money market mutual funds Total for maturity transformation Total liabilities of ABS issuers Total GSE liabilities Pool securities Total for credit transformation Total for the shadow banking sector Commercial bank liabilities Traditional banks liabilities** In % of banks’ liabilities In % of traditional banks’ liabilities

U.S.
1057 1213 733 2755 5758 2333 6561 1166 10060 15818 12828 7791 123% 200%

Europe
563 8086 1550 10199 2860 2860 13060 59640* 28675 22% 46%

* Commercial bank liabilities for Europe includes banks liabilities for the Euro Area and MFI liabilities for nonEA countries less MMF assets for the UK based on estimates from EFAMA data.** Traditional banks’ liabilities are deposits.

As shown in Table 5 and Table 6, there are several differences between the U.S. and the European shadow banking sector:  In the U.S., the shadow banking sector represents around 120% of banks’ liabilities, while in Europe, the corresponding figure is 22%. This fact can be partially accounted for by the

34

According to Pozsar et al. (2010), at the end of June 2007, European banks accounted for USD 480 billion of ABS issuance, German Landesbanks for USD 130 billion, against USD 590 billion for American financial institutions. 20

importance of market-based finance in the U.S. as opposed to a more bank-based financial system in Europe. Looking at traditional banks’ liabilities (deposits), the shadow banking sector represents 200% of banks deposits in the U.S. vs. 46% for Europe. In the U.S., the shadow banking sector performs mainly credit transformation (63%), while in Europe, this activity accounts for 22% of the total. This could be explained by the specific role played by GSEs in the mortgage market in the U.S., as well as by the importance of covered bonds market in Europe as an alternative to ABS35. Credit transformation is mostly done by the repo market in Europe (79%), while in the U.S. MMFs play a larger role36 (48%).
Table 6: U.S. and European shadow banking sectors (in %)

Component

U.S.

U.S by Europe activity
18% 21% 13% 48% 100% 23% 65% 12% 100% 22% 100% 12% 78% 22% 4% 62%

Europe by activity
6% 79%

Total outstanding open market paper Total repo liabilities Net securities loaned Total shares outstanding of money market mutual funds Total for maturity transformation Total liabilities of ABS issuers Total GSE liabilities Pool securities Total for credit transformation Total for the shadow banking sector

7% 8% 5% 17% 36% 15% 41% 7% 64% 100%

15% 100% 100%

100%

35

In 2009, outstanding covered bonds amounted to around EUR 2400 billion with EUR 1600 billion of covered bonds linked to mortgages (See ECBC (2010)). 36 Although uncertainties on data on the U.S> repo market may understate the role of the latter. Taking the figures from Hördahl and King (2008), the repo market would be USD 10000 billion in 2008, that is around 66% of credit transformation, against 80% for Europe. 21

IV.2. Why has the European shadow banking sector not collapsed?
An important difference between Europe and the U.S. is that the shadow banking sector has experienced a 20% decline in the U.S., while it has remained roughly stable in Europe (Chart 8).
Chart 8: Size of the shadow banking sector

Evolution of the shadow banking sector (2008Q1=100)
120

110

100

90

80 Shadow US 70 Shadow Europe 60

At this stage, only tentative and partial explanations can be put forward to account for this difference. Table 7 provides a comparison of the evolution of the two shadow banking sectors since 2008Q1 by component.
Table 7: Evolution of the shadow banking sector since 2008Q1 (% and USD billion)

Component

U.S. %

U.S.

Europe %
+17% -8%

Europe

Total outstanding open market paper Total repo liabilities Net securities loaned Total shares outstanding of money market mutual funds Total for maturity transformation Total liabilities of ABS issuers Total GSE liabilities Pool securities Total for credit transformation Total for the shadow banking sector

-41% -44% -46% -19% -34% -40% +110% -75% -13% -22%

-727 -951 -635 -627 -2941 -1559 +3429 -3435 -1565 -4507

+60 -535

-11% -7% +64%

-150 -625 +816

+64% +2%

+816 +190

22

As shown in Table 7, only MMFs have experienced a similar decline in the U.S. and in Europe. For commercial paper and ABS issuers, while the amounts outstanding have declined significantly in the U.S., they have increased in Europe. For commercial paper, one possible explanation may be that ABCPs were less used in Europe than in the U.S. Therefore, when the ABCP market collapsed during the financial crisis, its impact on the overall commercial paper market was more subdued in Europe than in the U.S. As shown in Chart 9, the U.S. and the European market experienced the same trend since 2007 (dashed line), however while the U.S. market declined by around USD 440 billion, the European market declined by merely USD 26 billion.
Chart 9: The ABCP market

Evolution of the ABCP market in Europe and in the U.S.
EUR, USD billion
1200 250

1000

Europe ABCP (Amounts outstanding) US ABCP (Amounts outstanding) Europe ABCP 2008Q1=100 (rhs)

200

800

US ABCP 2008Q1=100 (rhs)
150

600 100 400

50

200

0 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4

0

sources: AFME, FED

However, the substantial decline in the U.S. commercial paper market is also due to the decline of non-asset backed commercial paper, while in Europe the commercial paper has significantly developed. Several explanations can be put forward. A possible bias in the data can account for this difference as European data is based on STEP data whose coverage has increased over time. Another possibility could be that some large firms may have chosen to substitute commercial paper to shortterm credit due to the financial crisis. Lastly, the European CP market may have been less affected by the financial crisis thanks to a national investor base.

23

Chart 10: Evolution of the CP market
Evolution of the Commercial Paper market in Europe and in the U.S. (excluding ABCP)
140

EUR, USD billion
1200

1000

120

800

100

600

80

400

60

Europe CP (Amounts outstanding)
200

US CP (Amounts outstanding) Europe CP 2008Q1=100 (rhs) US CP 2008Q1=100 (rhs)

40

0 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4

20

sources: AFME, ECB, FED

Regarding the evolution of ABS issuers’ liabilities the discrepancy may be due to a different monetary policy framework for the ECB and the Federal Reserve. Before the crisis, monetary policy was mainly implemented by open market operations in the U.S., while the ECB used refinancing operations whereby loans were made to MFI against collateral. In particular, the ECB had favourable eligibility criteria37 for Asset-Backed Securities. In particular, some banks securitized their loans portfolios to increase their collateral basis by using the securitized tranches as collateral for ECB refinancing operations. Therefore, this framework may have sustained the issuance of ABS by European MFIs. According to Albertazzi et al. (2011): “Much ABS issuance in Italy (and in the euro area) since the end of 2007 has been related to their use as collateral in Eurosystem refinancing operations. According to informal estimates from market participants, approximately 90% of eurodenominated ABS issued in 2008 seems to have been used as collateral for ECB liquidity standing facilities rather than sold to the markets. This percentage is even higher if we consider only residential mortgage backed securities (RMBS)”. As shown in Chart 11, almost all European ABS issued in 2008 were retained instead of being sold to investors. This indicates that the high volume of ABS issuance during this period was mainly related to ECB refinancing operations. Chart 12 shows that this was indeed the case: while in 2006, ABS deposited as collateral amounted to EUR 110 billion (12% of total collateral), in 2008 they reached EUR 441 billion (28% of total collateral), according to ECB data.

In order to be eligible, ABS had to have at least a minimum credit rating of A-, however in 200o, the ECB toughened the criteria that ABS should at least have two eligible ratings from credit rating agencies for all deals issued as of 1 March 2010.
37

24

Chart 11: ABS issuance in Europe
European ABS issuance
EUR billion

1000

100%

900
800 700 600 500 400 300 200 100 0 2007
source: JPMorgan

90%
80% 70% Retained Public % retained (rhs) 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011

Chart 12: ABS used as collateral for ECB refinancing operations
Asset-Backed-Securities used as collateral for ECB refinancing operations
600

EUR billion

30%

ABS deposited as collateral at the ECB
500

ABS in % of total collateral deposited at the ECB (rhs)

25%

400

20%

300

15%

200

10%

100

5%

0 2006 2007 2008 2009 2010

0%

source: ECB annual reports

25

Conclusion
This paper aims at starting to fill a gap related to the absence of an estimate of the shadow banking sector in Europe. According to our estimates, the shadow banking sector amounted to around EUR9.5 trillion in 2010Q4 (USD 13 trillion), a sizeable figure and roughly similar to the size of the U.S. shadow banking sector (around USD 15.8 trillion). However, there are at least two striking differences: 1. while the U.S. shadow banking sector has declined during the financial crisis, the European shadow banking sector has remained broadly stable. A potential explanation may be that the ECB operational monetary policy framework may have played a role as it allowed the use of ABS for repo operations, effectively sustaining the ABS market. However, given that ABS stands for one quarter of the shadow banking system, other explanations may be needed to explain the evolution of the European shadow banking sector. 2. In Europe, the shadow banking sector performs mainly maturity transformation rather than credit transformation as in the U.S., that stems from the specific role played by GSEs in the U.S.. The results presented here are preliminary as the reliability of data sources can be questioned. Finally, it should be stressed that the lack of reliable data on the shadow banking sector is a concern and further work is needed in this area38. For the U.S., the shadow banking sector may represent between 120% and 175% of banks’ liabilities depending on the sources used39. Going forward, further work is needed on the inclusion of certain hedge funds activities and some exchange-traded products, securities lending, as well as on the role of credit rating agencies in the development of the shadow banking sector. It would also be useful to monitor the evolution of the EU shadow banking sector over time. The framework proposed here may provide a basis for such work.

38 39

as underlined by the G20 report on data gaps (G20 (2010)). See appendix 3 for details. 26

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27

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28

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29

Appendix 1: data used for assessing the size of the US shadow banking sector
Data Total outstanding open market paper Total repo liabilities Net securities loaned Total GSE liabilities Pool securities Total liabilities of ABS issuers Total shares outstanding of money market mutual funds Total liabilities of the commercial banking sector Data source in the Flow of Funds Line 1 of Table L.208 Line 1 of table L.207 Line 20 of table L.130 Line 21 of table L.124 Line 6 of table L.125 Line 11 of table L.126 Line 14 of table L.121

Line 19 of Table L.109

Appendix 2: data used for assessing the size of the European shadow banking sector
Data Total outstanding open market paper Total repo Net securities loaned Total assets of ABS issuers Data source ECB statistics STEP ICMA European repo survey Dataexplorer AFME securitisation report, ECB data on Other Financial Intermediaries, JPMorgan ECB MFI balance sheet statistics, Lipper data on MMF, EFAMA reports ECB MFI balance sheet statistics and nonparticipating Members States MFI balance sheet data Lipper data based on Lipper classification (Credit focus, Fixed income arbitrage and multi-strategy) Blackrock reports on the ETF industry

Total shares outstanding of money market mutual funds Total liabilities of the commercial banking sector

Credit Hedge funds data

Synthetic ETFs data

30

Appendix 3: data issues and alternative estimates
This section compares the main source of data used in the paper and provides alternative estimates.
Table 8: Alternative estimate of the U.S. shadow banking sector (USD billion)

Data

Period

Primary source Source Data

Alternative source Source Data

Difference coverage ratio =primary source/alternative source (in %) 18%

Total repo

2008Q2

Fed Flow of Funds Fed Flow of Funds Fed Flow of Funds

1893

Hördahl and King (2008) Dataexplorers

1000 0 1550

Securities lending

2008Q2

1359

87%

ABS outstanding

2008Q2

4372

SIFMA

2778

157%

Primary estimate of the shadow banking sector (in % of banks’ liabilities) Alternative (wide) estimate Primary estimate of the shadow banking sector (in % of banks’ liabilities) Alternative (wide) estimate

2008Q2

20176 (201%)

2008Q2

28283 (284%)

2010Q4

15820 (131%)

2008Q2

21117 (174%)*

*Figures estimated by using the estimates for 2008Q2 and computing changes from the primary estimate. For example the estimated figure for the repo market is computed as Fed2010Q4*(10000/1893).

31

Table 9: Alternative estimate of the European shadow banking sector (EUR billion)

Data

Period

Primary source Source Data

Alternative source Source Data

Difference coverage ratio =primary source/alternative source (in %) 95% 112%

Total MMF ABS outstanding Primary estimate of the shadow banking sector (in % of banks’ liabilities) Alternative (wide) estimate

2010Q4 2010Q4 2010Q4

ECB ECB

1132 2351

EFAMA AFME

1182 2090

9541 (22%)

2010Q4

9852 (23%)

32

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