Download Shadow Banking

Shadow Banking
Traditional Banking – Everything on One Balance Sheet, Under One Roof
Create/issue very short-term liabilities and
create/but long term assets
• Term “shadow banking” has been attributed to
economist and money manager Paul McCulley
• Describes a large segment of financial intermediation
that are outside the balance sheets of regulated
commercial banks and other depository institutions.
• Conduct functions of banking “without access to central
bank liquidity (Fed discount window) or public sector
credit guarantees (FDIC)”.
1. Loan Originator:
commercial bank,
finance company,
mortgage bank, …
mortgage, auto,
credit card loans, ..
2. Warehouse Bank
4.
5.
2.
3.
Shadow Banking System
Aggregator:
Originator:
Originates
a loan: auto,
student,
mortgage
•
•
•
Could be:
sell loans
Commercial
Bank
Mortgage
Company
Finance
Company
such as Ford
motor Credit
$$$
the Originator
An investment
bank
A large
Commercial
Bank
They form pools
and securitize
the loans
SPV
Loan
doc. Securitized ABCP
Loans
$$$
or
REPO
CP, ABCP,
Repo
MMMF
$$$
Shares
Repo
$$$
$$$
Investors:
Any entity that
has large
amounts of cash
they want to
park for short
period of time
Take long-term assets and transform into very shortterm liabilities.
Balance Sheets of Securities Firms and Investment Banks



Receivables represent trading activity, about 30% of assets.
Long position (investments), about 24% of assets
Purchase side of Repo, 34%. Lending short-term on the repo market.


45% of source of financing is short-term repo.
Equity is low at 4.46%.