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

2.

3.4.

5.

Shadow Banking SystemOriginator:Originates a loan: auto, student, mortgage• Commercial

Bank• Mortgage

Company• Finance

Company such as Ford motor Credit

Aggregator:Could be:

the OriginatorAn investment bankA large Commercial Bank

They form pools and securitize the loans

SPV

Securitized ABCP Loans or REPO

MMMF

Investors:Any entity that has large amounts of cash they want to park for short period of time

sell loans

$$$

$$$

Shares $$$Repo

$$$ $$$

Loandoc.

CP, ABCP, Repo

Take long-term assets and transform into very short-term 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.

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%.

45% of source of financing is short-term repo. Equity is low at 4.46%.