2013년 12월 3일 화요일

[메모: FRBNY Staff Report on] Shadow Banking (Feb 2012)

지은이: Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, Hayley Boesky
출처: Federal Reserve Bank of New York Staff Reports, no. 458 (July 2010 [Revised February 2012])
CF. 다른 참고자료: Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky, "Shadow Banking"


※ 발췌 (reading notes with excerpts):

ABTRACT: 

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 conduct maturity, credit, and liquidity transformation without explicit accet to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper(ABCP) conduits, structured investemtn 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 description and taxonomy of shadow bank entities and shadow bank activities are accompanied by "shadow banking maps" that schematically represent the funding flows of the shadow banking system.


1. Introduction

Shadow banks intermediate credit through a wide range of securitization and secured funding techniques such as asset-backed commercial paper (ABCP), asset-backed securities (ABS), collateralized debt obligations (CDOs) and repurchase agreements (repos).  These securities are used by specialized shadow bank intermediaries that are bound together along an intermediation chain.  We refer to the network of shadow banks in this intermediation chain as the shadow banking system.  While we believe that shadow banking is a somewhat pejorative name for such a large and important part of the financial system, we adopt it in this paper.

  Over the last decade, the shadow banking system provided sources of funding for credit by converting opaque, risky, long-term assets into money-like, short-term liabilities.  Arguably, maturity and credit transformation in the shadow banking system contributed to the asset price appreciation in residential and commercial real estate markets prior to the 2007-09 financial crisis.  During the financial crisis, the shadow banking system became severely strained and many parts of the system collapsed.  Credit creation through maturity, credit, and liquidity transformation can significantly reduce the cost of credit relative to direct lending.  However, credit intermediaries' reliance on short-term liabilities to fund illiquid long-term assets is an inherently fragile activity and may be prone to runs.[n.1]  As the failure of credit intermediaries can have large, adverse effects on the real economy (see Bernanke 1983; Ashcraft 2005) governments chose to shield them from the risks inherent in reliance on short-term funding by granting them access to liquidity and credit put options in the form of discount window access and deposit insurance, respectively.

   Shadow banks conduct credit, maturity and liquidity transformation similar to traditional banks.  However, what distinguishes shadow banks from traditional banks is their lack of access to public sources of liquidity such as the Federal Reserve's discount window, or public sources of insurance such as Federal Deposit Insurance.  The emergency liquidity facilities launched by the Federal Reserve and other government agencies' guarantee schemes created during the financial crisis were direct responses to the liquidity and capital shortfalls of shadows banks.  These facilities effectively provided a backstop to credit intermediation by the shadow banking system and to traditional banks for their exposure to shadow banks.

      In contrast to public-sector guarantees of the traditional banking system, prior to the onset of the financial crisis of 2007-2009, the shadow banking system was presumed to be safe due to liquidity and credit puts provided by the private sector.  These puts underpinned the perceived risk-free, highly liquid nature of most AAA-rated assets that collateralized credit reps and shadow banks' liabilities more broadly.  However, once private sector put providers' solvency was questioned, even if solvency was perfectly satisfactory in some cases, the confidence that underpinned the stability of the shadow banking system vanished.  The run on the shadow banking system, which began in the summer of 2007 and peaked following the failure of Lehman in September and October 2008, was stabilized only after the creation of a series of official liquidity facilities and credit guarantees that replaced private sector guarantees entirely.  In the interim, large portions of the shadow banking system were eroded.

   The failure of private sector guarantees to support the shadow banking system stemmed from largely from the underestimation of asset price correlations by every relevant party: credit rating agencies, risk managers, investors, and regulators.  Specifically, they did not account for the fact that the prices of highly rated structured securities become much more correlated in extreme environments than in normal times.  In a major systemic event, the price behavior of diverse assets becme highly correlated as investors and levered institutions are forced to shed assets in order to generate the liquidity necessary to meet margin calls (see Coval, Jurek and Stafford 2009).  Mark-to-market leverage constraints result in pressure on market-based balance sheets (see Adrian and Shin 2010a; Geanokoplos 2010).  The underestimation of correlation enabled financial institutions to hold insufficient amount of liquidity and capital against the puts that underpinned the stability of the shadow banking system, which made these puts unduly cheap to sell.  As investors also overestimated the value of private credit and liquidity enhancement purchased throught these puts, the result was an excess supply of cheap credit.

   The AAA assets and liabilities that collateralized and funded the shadow banking system were the product of a range of securitization and secured lending techniques.  Securitization-based credit intermediation process has the potential to increase the efficiency of credit intermediaion.  However, securitization-based credit intermediation also creates agency problems which do not exist when these activities are conducted within a bank.  In fact, Ashcraft and Schuermann (2007) document seven agency problems that arise in the securitization markets.  If these agency problems are not adequately mitigated with effective mechanisms, the financial system has weaker defenses against the supply of poorly underwritten loans and aggressively structured securities.

   Overviews of the shadow banking system are provided by Pozsar (2008) and Adrian and Shin (2009).  Pozsar (2008) catalogues different types of shadow banks and describes the asset and funding flows within the shadow banking system.  Adrain and Shin (2009) focus on the role of security brokers and dealers in the shadow banking system, and discuss implications for financial regulation.  Ther term "shadow banking" was coined by McCulley (2007).  Gertler and Boyd (1993) and Corrigan (2000) are early discussions of the role of commercial banks and the market based financial system in financial intermediation.

   The contribution of the current paper is to focus on institutional details of the shadow banking system, complementing a rapidly growing literature on the system's collapse.  As such, our paper is primarily descriptive, and focuses on funding flows in a somewhat mechanical manner.  We believe that the understanding of the plumbing of the shadow banking system is an important underpinning of any study of systemic interlinkages within financial system.

   ( ... ) Section 2 provides a definition of shadow banking, and an estimate of the size of shadow banking activity.  Section 3 discusses the 7 steps of the shadow credit intermediation process.  Section 4 [describes] the interaction of the shadow banking system with institutions such as bank holding companies and broker dealers. Finally, section 5 concludes.


2. What Is Shadow Credit Intermediation?

2.1 Defining Shadow Banking

In the traditional banking system, intermediation between savers and borrowers occurs in a single entity.  Saver entrust their savings to banks in the form of deposits, whih banks use to fund the extension of loans to borrowers.  Savers furthermore own the equity and debt issuance of the banks.  Relative to direct lending (that is, savers lending directly to borrowers), credit intermediation provides savers with information and risk economies of scale by reducing the costs involved in screening and monitoring borrowers and by facilitating investments in a more diverse loan portfolio.  Credit intermediation involves credit, maturity, and liquidity transformation.[:]
  • Credit transformation refers to the enhancement of the credit quality of debt issued by the intermediary through the use of priority of claims.  For example, the credit quality of senior deposits is better than the credit quality of the underlying loan portfolio due to the presence of junior equity.  
  • Maturity transformation refers to the use of short-term deposits to fund long-term loans, which creates liquidity for the saver but exposes the intermediary to rollover and duration risks. 
  • Liquidity transformation refers to the use of liquid instruments to fund illiquid assets. For example, a pool of illiquid whole loans might trade at a lower price than a liquid rated security secured by the same loan pool, as certification by a credible rating agency would reduce information asymmetries between borrowers and savers.
   Credit intermediation is frequently enhanced through the use of third-party liquidity and credit guarantees, generally in the form of liquidity or credit put options.  When these guarantees are provided by the public sector, credit intermediation is said to be officially enhanced.  For example, credit intermediation performed by depository institutions is enhanced by credit and liquidity put options provided through deposit insurance and access to central bank liquidity, respectively.
       ( ... )




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