Discussion of “Do Global Banks Spread Global Imbalances?”
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Discussion of “Do Global Banks Spread Global Imbalances?”

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Discussion by Adam Ashcraft of the Federal Reserve Bank of New York of a paper presented at the Jacques Polak Research Conference -- Financial Frictions and Macroeconomic Adjustment, Washington DC, ...

Discussion by Adam Ashcraft of the Federal Reserve Bank of New York of a paper presented at the Jacques Polak Research Conference -- Financial Frictions and Macroeconomic Adjustment, Washington DC, November 5—6, 2009

http://www.imf.org/external/np/res/seminars/2009/arc/index.htm

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Discussion of “Do Global Banks Spread Global Imbalances?” Discussion of “Do Global Banks Spread Global Imbalances?” Presentation Transcript

  • Discussion of “Do Global Banks Spread Global Imbalances?” Adam B Ashcraft Credit, Investment, and Payment Risk
  • Overview of paper  ABCP conduits ($1.2 trillion in June 2007) were used by global banks to manufacture “riskless debt” by purchasing the medium- term private debt of countries with current account deficits using short-term debt and a bank-sponsored backup line of credit (section 3.1)  ABCP conduits were sponsored by both current account surplus and deficit countries (section 3.2), but were more prevalent in countries with weaker capital requirements for backup lines of credit (section 3.3)  Focusing on the largest publicly-traded banks in the US and Europe, banks with more ABCP exposure relative to equity capital had more negative equity returns during August 2007 (section 4) 2
  • Shadow Bank Liabilities July 2007, estimated Short Term Long Term ABCP MTN $1200 billion $2000 billion Securities lending LTD $600 billion $??? billion Broker-dealer repo Equity $2500 billion $??? billion Finance company CP $400 billion Total ~ $10,000 Billion Liquidity puts $700 billion 3 3
  • Reserve Board Source: Federal 500 1000 1500 2000 2500 3000 Billion Nov 1 1995 May 1 1996 Oct 30 1996 Apr 30 1997 M1 Oct 29 1997 Apr 29 1998 Oct 28 1998 Apr 28 1999 Oct 27 1999 Apr 26 2000 CP Oct 25 2000 Apr 25 2001 Oct 24 2001 Apr 24 2002 Oct 23 2002 Apr 23 2003 Oct 22 2003 Apr 21 2004 Oct 20 2004 Apr 20 2005 Oct 19 2005 Reverse Repo Apr 19 2006 Oct 18 2006 Apr 18 2007 Oct 17 2007 Apr 16 2008 Oct 15 2008 Apr 15 2009 4 M1 is a bad Proxy for Short Term Funding Short Term Liabilities: CP, Reverse Repos, M1 500 1000 1500 2000 2500 3000 Billion 2008 Sep 15, 4 Jul 18, 2007
  • Bank deposit rates and money market yields 5
  • ABS Demand by Investor Type Billions $ 2007 2009 (excluding TALF) SIV lites 18 43 Securities arbitrage conduits 107 50 Prime money market 20 ABS CDO Mezz 72 Enhanced cash accounts 100 SIVs 75 Securities lenders 80 ABS CDO HG Source: JP ABS Demand Collapsed6 6
  • ABS Issuance: Growth and Collapse by Asset Class 350 Other 300 Non-U.S. Residential 250 Mortgages Student Loans $ Billions 200 Credit Cards 150 Autos 100 Commercial Real Estate 50 Home Equity (Subprime) 0 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Source: Sep-08 7 JP 7
  • Shadow Bank Topology Balance Sheet for ABS (1) Good SIVs Bad SIVs SIV Lites (Limited Purpose Finance Cos.) $100 billion assets $400 billion assets $50 billion assets ABCP ~20% AAA-A AAA-A ABCP ~60% ABCP ~40% AAA-A (heavy MTN ~50% (subprime (no MTN ~30% subprime MTN ~30% exposure) subprime) exposure) LTD ~20% LTD ~0% LTD ~20% Capital Notes ~15% BBB-B Capital Notes ~15% BBB-B Capital Notes ~10% levered ~7x levered ~7x levered ~10x Origination of Loan and ABS Shadow Bank Funding Multiseller Conduits Term ABS ABS CDOs (loan accumulators) (SPV, maturity matched) (resecuritization) $525 billion assets AAA-A AAA-A AAA-A Finance Companies and BHCs Loans 100% ABCP Loans MMFs (loan originators) BBB-B BBB-B (funding) BBB-B Parent CF Equity Equity CD levered ~ ∞ levered 5-10x levered 5-10x CP ABCP MTN, MMF Loans Conduit Single-Seller Conduits Floaters Shares ABS (maturity transformators) MTN, LTD $150 billion assets Equity 60 days 1 day Loans 100% ABCP implicit levered levered ~15x Balance Sheet for ABS (2) Securities Arbitrage Conduits Securities Lenders MMFs $150 billion assets $600 billion assets $50 billion assets A1 (MMF) MMF *Hybrid conduits were a AAA-A 100% ABCP AAA-A T-Bonds tranches Shares mixture of single-seller, multiseller and arb conduits and had $210 in CP outstanding at the levered ~ ∞ levered ~50x implicit leverage 8 peak. 8
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