SHADOW BANKING FINAL.pptx

7/27/2019 SHADOW BANKING FINAL.pptx

1/38

Seminar on

MANAGEMENT OF BANKING AND

FINANCIAL SERVICES


2/38

TODAYS AGENDA

17/7/2013

1

SHADOW BANKS:Introduction to it.

2 SHADOW BANKS:

Prime cause for 2007 crisis.

3 SHADOW BANKING:The Chinese scenario.


3/38


4/38

Shadow bank vs. Normal

bank

Access No access to central bank funds

Safety

No Safety nets from FDIC((FederalDeposit Insurance Corporation)

Trading Banks do not take deposits instead

rely on asset backed C.P and CDOs


5/38


6/38

SHADOW BANKING

SYSTEM:

VOLUME:

Year Size of SBS (FSB)

2007 - $25 Trillion2011 - $24 Trillion


7/38

Five steps of shadow banking

1. Make loans.2. Make securities.

3. Sell securities.

4. Set up (SPVs)5. Trade (CDOs)


8/38

Mortgaged Backed Securities -MBS

Secured by a mortgage(asset)

Lent to home buyers.

Default of the loan leads to surrenderof the asset.

Given by small regional banks.

Middlemen's job


9/38

Collateralized debt obligations - CDO

Backed by a pool of bonds, loans.An investment-grade security,

Do not specialize in one type of debt

Often mortgage loans

Different types of debt are often referred to

as 'tranches' or 'slices

PRIME

NON PRIME

SUBPRIME


10/38

Commercial PapersCPs

A short-term investment vehicle

With a maturity (90 and 180 days.)

Issued by a bank and Companies.

Used for short-term financing needs.


11/3817/7/2013


12/38

Shadow BankersAsset management

firms

Bank holding

companies Banks, investment

Banks, traditional

Hedge funds Insurance

companies

Private equity firms

Securitizing firms

Sovereign wealth

funds


13/3817/7/2013


14/38

17/7/2013


15/38

3 Stage destruction and

turmoil

C.PS

CDOS

MBSS

17/7/2013


16/38

IN THE 70S

In 1970 banks were just doing Vanillabanking.

Corporate went for C.Ps (started by Coke andGE)

Banks had protection form FDIC (FederalDeposit Insurance Corporation)

C.Ps :1. Short term

2. Risky (comparatively)

3. Not protected

17/7/2013


17/38

THE STARTCITIGROUP

Known for products with heavy risk

hate to lose investors wanted a safe play:-(only high rated quality assets).

Need was to create a new place ofinvestment vehicle.

17/7/2013

NICK SOSSIDISPARTIDGE HICKS


18/38

Android of Citi called the ALPHA

(The 1st so called shadow bank ever)

Not banks, early forms of SPV.

FUNCTIONS

1. Trade in only high rated bonds(strictly)2. Raise the money though Short term C.Ps.

3. Chances of failing = ZERO

Umbilical cord with citi ( Back stop

facility) 17/7/2013

C.PS High ratedbonds


19/38

GET SET GO!!!

IKB Deutshe Industrial bank Formed a new android called the

RHINELAND.

Similar to alpha but much more risky

(next shadow product)

New rules of Umbilical cord

High risk Better fee Constantdemand 17/7/2013

C.PS CDOS


20/38

GORDIAN KNOT

Introduction of SIGMA. (yet another shadowproduct)

IOSS maturing @ longer years (reducerisk of payment)

Same as Alpha but didnt have theumbilical cord!

Medium term notes (MTN)..LONGERMATURITY.

The thing was growing @ million

dollar pace.

17/7/2013


21/38

Analysts team of Moddy quit to form aSIV.

Moddy was analyzing the sigmas that

time. Patenting a financial innovation:

difficult

Sigma clones spread like forest fire. $3 Trillion of IOUs were soldfor

highhy risky and subprime CDO.

Shadow banking @ its height!17/7/2013

Thieves steal to gain!


22/38

Banks become BLACK!

Banks wanted higher returns.

To grow faster, take high risk

Banks set up shadow institutions.

17/7/2013

MorganStanley Cheyne

Barclaysbank AVENDIS

And many more likethis


23/38

Unlike sigma they were taking huge

risks

Paradoxthese were sold to hate tolose investors

Investors never knew the CDOs (bad)

behind the IOUs. Japanese weren't ready so the their

scapegoat were The liquidity flushed

MIDDILE EAST NATIONS. The giant CDOs were managed by

the HEDGE FUND.

17/7/2013


24/38

The turmoil begins

The shadow bankers wrongassumptions:

The housing prices will always sore-

NO

The default loans will not effect the giant CDOs

NO

Buying the rating companies will always ensure

constant demand for shadow products

THAT DIG THEIR GARVE.

The turmoil began..slowly

17/7/2013


25/38

The stage 1, the loans turned bad.

The MBS lost all its market value.

The stage 11, the CDO s lost all itsvalue and no inflow of cash. Therewere millions of unsold CDOs (likerotten onions)

The stage 111, the C.Ps

Matured and the lack of liquidityMade them sell more CDOs for

Loss and the Shadow institutions

17/7/2013

MBSS

CDOS

C.PS


26/38

17/7/2013


27/38

Sizeable informal financial sector.

Financial intermediaries not registered

Include informal lenders, kerbside capitalists, back-

alley bankers.

Wealth management products offered by

regulated banks and trusts.

Provide credit outside traditional, and more highlyregulated, banking model.

In violation of Chinese law.

Careless local governments .

THE BROAD OUTLOOK


28/38


29/38

1. The local governments borrowing behavior.

2. Structure of banking industry.

3. Underdevelopment of the corporate bond

market.

4. IPO regulatory frame work.

5. Negative real deposit rates, due to high

inflation.

Reasons for emergence of shadow banking.

Part 1: THE CreditKulaks.


30/38

According to Xiao Gang, The Chairman of, The Bank of

China.

Area of wealth management products is especially

concerning.

Estimates

20% of total bank assets.

33% increase since 2010.

Yields reaching 70%!

Scale of shadow banking


31/38

17/7/2013

Not really.

It is well diversified and serves a legitimate consumer

base.

Have much lower leverage than the banks or other

Corporate China.

Losses often absorbed by the entrepreneurs

themselves.

They help those in financial repression.

Is this form of shadow banking really bad?


32/38

Wealth management products.An alternative to a bog-standard bank deposit.Peoples Bank of China, deposit interest rates 3.5%WMP 5% to Above 8%(www.euromoney.com)

WMPs to be over 20,000,

Total value of WMPs to be 12.14 trillion RMD by 2012.Characterized this shadow banking sector as a potentialsource of systemic financial risk, whose model isfundamentally a Ponzi scheme.

The shadow banking. Part ll

WMP

BY BANKSBY

TRUSTS
http://www.euromoney.com/http://www.euromoney.com/


33/38

17/7/2013
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/06-2/chinawealth.gif


34/38

Comparable to CDOs.

The Global Financial Crises.

The nature of Chinese economy.-export oriented.

-Low cost of labour and HUKOU.

-Interest in infrastructure.

The Economic stimulus.

How it started?


35/38

17/7/2013

Fuelling of Speculative housing bubble.

Inefficient State owned enterprises.

Sunk investments into LGFVs.

Post Reducing stimulus.

The rise of WMVs.

Impact of Economic Stimulus.


36/38

17/7/2013


37/38

17/7/2013


38/38

AN HUMBLE OFFERING AT HIS DIVINE LOTUS FEET

SAIRAM

SHADOW BANKING FINAL.pptx

Documents

Transcript of SHADOW BANKING FINAL.pptx