The Shadow Banking System

Conceptualized, designed and created by Zoltan Pozsar (zoltan.pozsar@ny.frb.org) The Federal Reserve Bank of New York, November, 2009
The Traditional Banking System
The Traditional Bank ing Sy ste m ("Ori gi nate-to-Hold-to-Maturity-and-Fund-wi th-Deposi ts")

`

Ultimate Borrowers

Short-Term Funding
De posits

Debt Funding (Short and Long-Term Deposits

Short- to Long-Term Cash Depositors
Money Market "Portfolios"

Ultimate Creditors

Loans

Checking Accounts CDs

Deposits

Equity

Households, Businesses, Governments Borrowers Loans Assets Bonds Equity Assets Loans

Com merc ial Bank s

Checking Account MMDAs CDs

ShortTerm Savings

Households, Businesses and the Rest of the World

Loans

Dollar Deposits Equity

Equity Funding
Real Money Acc ou nts*

Long-Term Investments Equity Funding
Equity Portfolios

Loans

Bank Equity

Bank Equity

Client Funds

Bank Equity

Term Savings

*Asset Managers, Insurance Companies and Pension Funds

Discount Window Loan Collateral Reserves

Ag enc y De bt Pu rc hase s

Ag enc y MBS Pu rchase s

Ag en cy De bt Pu rc hase s

`

Agency Debt

Reserves

Agency MBS

Reserves

Agency Debt

Reserves

11/25/2008

11/25/2008

11/25/2008

Federal Responses (Shadow Bank Backstops)

Deposit Insurance (FDIC)

Public Credit Transformation (Tail Risk Absorption)

Public Risk Repositories (Tail Risk Absorption)

FDIC Deposit Insurance Equity

Federal Government No Explicit Fees No Explicit Fees Implicit Insurance No Explicit Fees Implicit Insurance No Explicit Fees Implicit Insurance

Public Risk Repositories

GSEs, DoE, SBA

Fe de ral Gove rnme nt

European Sovereign and Quasi-Sovereign States

Temporary MMMF Guarantee No Explicit Fees MMMF Insurance

PBGC

Insurance Premia

Implicit Insurance

Insurance Premia

Implicit Insurance

9/18/2008 *Funded by UST's $50 billion Exchange Stabilization Fund

The "Cash" Shadow Banking System

Deposit Insurance (FDIC)

Liability Insurance (Federal Government)

Credit Insurance (GSEs, DoE, SBA)

Liability Insurance (Federal Government)

Liability Insurance (EU Government)

Insurance Guarantees

Step (1): Loan Origination

Step (2): Loan Warehousing

Step (3): ABS Issuance

Ste p (4 ): ABS Warehousing

Step (5): ABS CDO Issuance

Step (6): ABS "Intermediation" Off-Balance Sheet ABS Intermediation On -Balance Sheet ABS Intermediation

Catalogue:, Shadow Bank Liabilities

Ste p (7 ): Wholesale Funding (Shadow Bank "Depositors")

Short-Term Debt Instruments

Ultimate Borrowers

Fann ie and Fred die *

Agency MBS TBA Market Loans* Agency PassThrough

CMOs (Time-Tranched Agency MBS)
Th e Gove rnme nt-Sp onsore d Shadow Bankin g System (Public Ori gi nate-t o-Di stribu te Model)

Agency Discount Notes Loans ABS Agency Bills

Regulated Money Market Intermediaries

Unregulated Money Market Intermediaries

Direct Money Market Investors Corporate Treasure rs

Ultimate Creditors

*Conforming mortgages
FH LBs Fann ie and Fred die

Federal Government
O ff-Balance Sheet

The GSEs' Cre dit In terme diation Proce ss

Agency MBS

CMO Tranches

A1 CP $1 NAV ABCP Shares RRs Other* *ARS, MMMFs

Cash "Plu s" Fun ds

Discount Notes Loans Agency Debt Equity

FFELP ABS

A1 AAA Loans* AA-BBB Equity *Conforming student loans
SBA ABS

(Retained Portfolios) Agency Discount MBS Notes Private Agency ABS Debt FHLBs (Retained Portfolios) Agency Discount MBS Notes Private Agency ABS Debt

Liquidity Puts ARSs Munis TOBs or ABS VRDOs 2a-7 MMMFs A1 CP $1 NAV ABCP Shares BDP RRs Other* *TOBs and VRDOs

Wholesale Funding (Short-Term Funding)

A1 AAA Loans* AA-BBB Equity *Conforming SBA loans

Off-Bal ance Sheet

A1 (AAA) ABS Tranches Loans A1

A1 CP ABCP $1 NAV Shares BDP RRs Other* *ARS, MMMFs, as well as MTNs and term ABS

En han ced Cash Funds

Home

1st Lien Equity

Loans

High -Grade CDO s

Securities Households
Sub prime Home owne rs

Haircuts O/C Multi-Seller Conduit* (Warehouse and Term) Loans ABCP Broker-Dealer* Structuring and Syndication *FHC affiliate High-Yield CLOs (LBO Loans) A1 AAA Loans AA-BBB Equity Consumer ABS (Credit Card ABS) A1 AAA Loans AA-BBB Equity Repo Conduits Reverse Repos* O/C Hybrid Conduits AA-BBB O/C ABCP ABCP AA-A

Off-Balance Sheet

Supers AAA AA-BBB Equity

Asset Manager* Arbitrage Conduit AAA ABCP AA-BBB O/C
Liqu idity Puts*

FHCs' Cred it Inte rm ed iation Proc ess

Dollar Deposits ABCP Repo LTD Equity *FHC affiliate

Single-Seller Conduit Loans ABCP

Off-B alance Sheet

"Prime" Homeowners

Com merc ial Bank *

Subprime, RMBS, CMBS A1 AAA Loans AA-BBB Equity

Trading Books AA-BBB Repos

SIV, SIV-Lite

CP

AAA CP AA-BBB LTD MTNs Supers CNs* *Capital Notes

Loans

CP

ABCP

Assets

Loans

Home

1st Lien 2nd Lien

Loans ABCP ABS

Offshore (non-2a-7) MMMFs A1 CP ABCP $1 NAV Shares BDP RRs Other* *TOBs and VRDOs

A1 CP $1 NAV ABCP Shares BDP RRs Other* *ARS, MMMFs, as well as MTNs and term ABS

Bank Treasurers A1 CP $1 NAV ABCP Shares BDP RRs Other* *ARS, MMMFs

Short-Term Savings Money Market Portfolios Direct ShortInvestmen Term $1 NAV Savings Shares

Me zz anin e CD Os

Equity
Consum ers

Fin anc e Comp any *

O ff-Bal ance Sheet

Loans

MTNs Equity *FHC affiliate O/C

The "Inte rnal" Shad ow Ban king Sy stem (Priv ate O riginate-to-D istribute Model )

Goods & Services

Loans

CP ABCP BDP

Single-Seller Conduit Loans ABCP

O/C *FHC affiliated

BBB

Supers AAA AA-BBB Equity

*FHC affiliate LongTerm Munis ShortTerm Munis

BDPs

Ultra-Short Bond Funds A1 CP ABCP $1 NAV BDP Shares RRs Other* *ARS, MMMFs, as well as MTNs and term ABS

LGIPs A1 CP ABCP $1 NAV Shares BDP RRs Other* *MMMFs

Households and Nonprofits
Savings:

Excess Cash
Swee p Acc ou nts

"Equity"

Loans

BDPs

*ARSs, TOBs, VRDOs

A1 CP $1 NAV ABCP Shares BDP RRs Other* *ARS, MMMFs

Nonfinancial Corporates
Savings:

Excess Cash

"Equity"
Fe deral Rese rve

Bu sinesses

Europe an Banks

Eu rope an Bank s' Shadow Banki ng Ac tivites

Investments

C&I Loans

Bu sinesses

(Warehouse and Term) Loans ABCP

Loans Assets Bonds Equity
Private Eq uity Portfolio Comp anies

Wh ole sale Fun ding (Ov ernight Fundi ng)

Nonfinancial Businesses

Mu lti-Seller Conduit*

Hybrid Conduits (ABS Warehouse Conduits) AA-BBB O/C ABCP

SIV AAA CP AA-BBB LTD MTNs Supers CNs* *Capital Notes

Off-Balance Sheet

[…] Mezz ABS Mezz CDO Euro Deposits Equity

DW TAF
FX Swaps

Tri-Party Re po Sy ste m

Tri-Party Clearing Banks*

Federal, State and Local Governments Cash lending for securities collateral
Savings:

CRE

CRE Loans

Reverse Repos

ABS Collateral

Excess Cash

"Equity"

TSLF TSLF PDCF CPFF TALF AMLF MMIFF ML, LLC
ML II, LLC ML III, LLC

Reserves

Arb itrag e Conduit

Off-Balance Sheet

O/C *European bank affiliated

Europe an Banks

[…] Mezz ABS Mezz CDO Euro Deposits Equity

*BoNY and JP Morgan Chase

AAA ABCP AA-BBB O/C

LSAPs OMO Collatera l

Firms

LBO Loans

RoW (Foreign Central Banks)
Savings: Me diu m-Term Instrume nts Age nt Sec uritie s Len ding

Equity

FX Reserves

Local Currency

Fed eral Governm ent Fin anc e Comp any *

Tax Revenues

Treasury Bonds Loans

DBDs' Cre dit Inte rmed iation Proce ss

CP ABCP BDP MTNs

Single-Seller Con duit

O ff-Balance Sheet

Loans O/C

ABCP
Brok er-D ealer*

RMBS (1st lien, private label) A1 AAA Loans AA-BBB Equity Subprime ABS (2nd lien, subprime, HELOCs) A1 AAA Loans AA-BBB Equity CMBS and High-Yield CLOs (LBO Loans) A1 AAA Loans AA-BBB Equity

Cred it H edg e Fu nd*

MTNs Loans ABS Private MTNs
Wholesale Fu nding (Medi um-Term Funding)

AAA Repos
High -Grade CDO s

AA-BBB *Broker-dealer affiliate Trading Book Super Seniors Repos Super Seniors

Governments
State Gove rnme nts

Equity *Broker-dealer affiliate

Trading Books AA-BBB Haircuts Repos

AA-A

The "External" Shadow Bank ing Syste m (Independent Speciali sts: Ori ginate-to-Fun d Model | DBDs: O riginate-to-D istribute Model )

Tax Revenues

Bonds

Tax Revenues

State Bonds

Structuring and Syndication
Industrial Loan Comp any *

Supers AAA AA-BBB Equity

Asse t Manager, Prime Broke r

A2 & A3 (AAA) ABS Tranch es

Cash Reinvestment Accounts A1 CP Cash ABCP Collateral BDP RRs Other* *MMMFs, MTNs, term ABS and TOBs and VRDOs

Se curities Le ndin g*

Cash Collateral

Securities Lent

RoW (Sovereign Wealth Funds)
Savings:

*Done by custodian banks on an agent basis.

Export Revenue FX Reserves

"Equity"

Me zz anin e CD Os

Loans

AAA (A2-A3)

Prin cip al Sec urities Len din g

Bonds*

Local Governm en ts

Tax Revenues

Muni Bonds

Loans

Brokered Deposits

O ff-Balance Sheet

Broker Sweep Accounts Brokerage Brokered Clients' Cash Deposits Balances

*DBD affiliate

BBB

Supers AAA AA-BBB Equity

*Broker-dealer affiliate
Liqu idity Puts*

Ag enc y De bt*

Equity *Broker-dealer affiliate

LongTerm Munis

ShortTerm Munis

Loans ABS

Agency Debt

*ARSs, TOBs, VRDOs

*Medium-term debt

Cash Reinvestment Accounts A1 CP Cash ABCP Collateral BDP RRs Other* *MMMFs, MTNs, term ABS and TOBs and VRDOs

Se curities Le ndin g*

*Issued to central banks in exchange for investibe FX Long-Term Savings

Cash Collateral

Securities Lent

Fixed Income Portfolios* Term Debt Savings CNs *Bank, Shadow Bank and Corporate Debt

*Done by real money accounts on a principal basis.

Standalone Finance Com pany

ABCP Loans MTNs Equity O/C Multi-Seller Conduit* ("Rent-a-Conduit") Loans
Captive Financ e Company Ind ustrial Loan Company*

Repos AA-BBB Haircuts

Inde pe nde nt Spec ialists' Cre dit Inte rmed iation Proce ss

CP

Single-Seller Conduit Loans ABCP

Consumer ABS (Card, Auto, Student Loan) A1 AAA Loans AA-BBB Equity Other ABS (Floorplan, Equipment, Fleets) A1 AAA Loans AA-BBB Equity Middle-Market CLOs (Loans to SMEs) A1 AAA Loans AA-BBB Equity

Cre dit Hed ge Fund

AAA

Long-Term Instrume nts (LTD) Long -Te rm D eb t

Loans ABS

ABCP

AAA AA-BBB LTD

CP

Wh ole sale Fun ding ( Term Debt Funding)

LPFCs

Private LTD Agency LTD

Asset Managers* Cash MTNs LTD Client Funds Equity Structured Credit *Mutual Funds, ETFs, Separate Accounts

Equity Portfolios* Public Equity Term Savings

*Bank and Corporate Debt

Loans

CP ABCP BDP MTN LTD Equity

O/C *Independent conduit

MTNs CNs* *Capital Notes
REITs

A4 and AA-BBB ABS Tranc he s

Loans

AAA (A4) AA-BBB

Pe nsion Fun ds, Insurance Com pan ies*

Loans

Brokered Deposits

[…]

[…]

CDOs HG ABS Mezz ABS Super Senior Super Senior

Equity *Finance company affiliate

Cash MTNs LTD Pension Liabilities Equity Structured Credit *Public and Private Pension Funds, and Life and P&C Insurance Companies

Struc tured Credit Portfolios*

Debt Tranches Term Equity Savings Tranches *Term ABS and CDO debt and equity tranches

Credit Insurance (Mortgage Insurers)

Credit Insurance (Monolines)

Credit Insurance

Credit Insurance

Private Risk Re positori es

Equity ABS Structured Credit Equity ABS Loans and CDO ABS Equity

MTNs

Debt Insurance

Premia

Credit Insurance

Premia

Credit Insurance

Premia

Credit Insurance

Client Funds

Equity *Hedge Funds and Private Equity (only credit exposures)

Equity *Unaffiliated with originators!
Federal Responses (Shadow Bank Backstops)

Equity *Unaffiliated with originators!

Equity *Unaffiliated with originators!

CPFF

TALF

TSLF/Maiden Lane LLC Warehoused ABS Reserves

Maide n Lane III LLC

TAF

FX Swap s

TSLF/ PDCF

AMLF ABCP Reserves Nonrepo MMS

MMIFF Reserves

Maiden Lane II LLC Subprime ABS Reserves

CP Reserves ABCP 10/7/2008 11/25/2008 AAA Reserves

CDS on CDOs

Reserves

ABS

Reserves

$

FX 12/12/2007

Tri-Party Collatera l

Reserves

3/11/08 and 3/24/2008, respectively

10/11/2008

12/12/2007

3/11/08 and 3/16/08, respectively

9/19/2008

10/21/2008

11/10/2008

The "Synthetic" Shadow Banking System

Counterparty Hedges

Warehouse Hedges

Counterparty Hedges

Warehouse Hedges

Warehouse and Counterparty Hedges

Ultimate Borrowers

Single -Name and Inde x Corporate CDS

CDPCs

CPDO s* The "Synth etic " Shad ow Bankin g System (Deriv ativ es-Based R isk Repositories)

Sh ort-Term Sy nthe tic Liabilities

He dge rs*

Bond(s)

CDS

Unfunded Protection Funded Protection

Protection Sold Equity
Broke r-De alers*

[…]

AAA

Households, Businesses, Governments Loans Assets Bonds Equity

Private Risk Rep ositorie s

Equity *Referencing corporate loan indices, etc.

Loans, ABS and CDOs

Portfolio Protection* Funded Protection Insured Assets Hedges Term Savings

Ultimate Creditors

Single -Name and Inde x Sovereign CD S

*Hedging Motives
Long-Term Sy nthe tic Liabilities

Households, Businesses, Governments and the Rest of the World (RoW)

Bond(s)

CDS
Credit He dge Fund s

Counterparty Hedges

Warehouse Hedges

Protection Bought

Protection Sold

Counterparty Hedges

Warehouse Hedges

Warehouse Hedges

Loans, ABS and CDOs

Broker-dealer CVA desks, ABS pipeline hedges, negative basis traders, real money accounts, etc.

Funded Protection
Sp ecu lators* Synthetic Exposure s*

Structu re d Cre dit and Loan CD S In dic es

Loan(s)

CDS

Unfunded Protection Funded Protection

*Market Makers Protection Sold Equity

Fun ded Sy nth etic CDO s*

(Credit-Linked Notes) AAA Treasurys AAA

Unfu nde d Synth etic CD Os*

Counte rparty Risks*

AAA AA-BBB Equity *Referencing single-name CDS indices, etc. […]

AA-BBB Equity Referencing ABS and single-name CDS indices, etc.

Loans, Unfunded ABS Protection and CDOs *Inability to meet unfunded liabilities, etc.

"Naked" Positions

Credit Bets

Term Savings

*Speculative Motives Proprietary trading desks, credit hedge funds, etc.

Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))

 

Synthetic Credit Liabilities

Credit He dge s

TLGP

Loans

Provision of Risk Capital

Credit "Refe renc es"

Mortgage Insurers*

Monoline Insurers*

Diversified Insurance Co.

Private Credit Transformation ( Tail Risk Absorption)

Public Equity
Alternative Asset M anagers*

Cash MTNs LTD

 

Bank Eq uity

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