23 November 2013
The Dark Side of Shadow Credit Intermediation
Adam B AshcraftSenior Vice-President and Head of Credit Risk Management
2
Why does shadow credit intermediation exist? Why should we be concerned? What have we learned? What should we worry about now?
Outline
3
Why does shadow credit intermediation exist?
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Traditional Maturity Transformation Shadow Maturity Transformation Traditional Credit Transformation
Shadow Credit Transformation Other Liabilities
Source: Ashcraft, Adrian, and Cetorelli (2013)
4
Regulatory arbitrage Neglected risks Funding fragilities Leverage cycles Agency problems
Why should we be concerned?
5
What went wrong?Asset-backed commercial paper
$-
$200.00
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
$1,400.00
2001
-01
2001
-09
2002
-05
2003
-01
2003
-09
2004
-05
2005
-01
2005
-09
2006
-05
2007
-01
2007
-09
2008
-05
2009
-01
2009
-09
2010
-05
Non-Financial
Financial
ABCP
6
What went wrong?Money market mutual funds
0
500
1000
1500
2000
2500
0
500
1000
1500
2000
2500
Jan-08 Jul-08 Jan-09 Jul-09
Government
Billions of Dollars Billions of Dollars
Source: Moneyfundanalyzer Note: Shaded area September 16 - October 21
Prime
Figure 5: U.S. Money Market Fund Assets by Fund Type
Tax-free
7
What went wrong?Tri-party repo
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
1994 1997 2000 2003 2006 2009
Overnight Repo
Financial CP
M2
Mar 19 2008
Dec28 2009
Aug 8 2007
2.43
0
200
400
600
800
1000
1200
1400
1600
1800
0 20 40 60 80 100
Option Adjusted
Spread (bps)
Haircut (%)
May 2007
May 2008
May 2009
8
Securitization
$0
$100
$200
$300
$400
$500
$600
0
100
200
300
400
500
600
Mill
ions
Bond
Cou
nt Total Bond Issuance
$ Count
9
What went wrong?Government Sponsored Agencies
FHLB Advances outstanding Non-FHLB vs FHLB Libor panel bid
Source: Ashcraft, Bech, and Frame (2008)
10
What went wrong?Credit Derivatives
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Credit Derivatives, Notional ($billions)
11
What to worry about now?Agency Mortgage REITs
19992000200120022003200420052006200720082009 2010201120120
50
100
150
200
250
300
350
400Remaining amREITs
(5th) ARMOUR Residential REIT Inc.
(4th) CYS Investments Inc.
(3rd) Hatteras Financial Corp.
(2nd) American Capital Agency Corp.
(1st) Annaly Mortgage Magement Inc.
$ Billions
12
What to worry about now?Reinsurance
This figure reports life and annuity reinsurance ceded by U.S. life insurers to affiliated and unaffiliated reinsurers. Reinsurance ceded is the sum of reserve credit taken and modified coinsurance reserve ceded.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2320921
13
What to worry about now?Leveraged Lending
Share of new-issue institutional loan allocations by investor type
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1Q13
CLO Prime-rate fund Hedge, distressed & high-yield funds Other
Source: S&P Capital IQ LCD
Covenant-lite volume $100B
$80B
Volume Percent
75%
60%
$60B 45%
$40B 30%
$20B 15%
$0B 0%
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13
Source: S&P Capital IQ LCD
14
What to worry about now?Chinese Shadow Banking
-20
0
20
40
60
80
100
120
140
-20
0
20
40
60
80
100
120
140
Dec-08 Aug-09 Apr-10 Dec-10 Aug-11 Apr-12 Dec-12
Entrusted loans
Trust loans
Net corp bonds (ex-banks)
China: Growth in Shadow Finance ComponentsPercent, y/y Percent, y/y
10
15
20
25
30
35
40
10
15
20
25
30
35
40
Dec-07 Oct-08 Aug-09 Jun-10 Apr-11 Feb-12 Dec-12
Total financing (incl off-balancesheet, trust loans, net corpbond/equity)
Bank loans
China: Bank Credit and Total Financing GrowthPercent, y/y Percent, y/y
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