Discussion by Adam Ashcraft of the Federal Reserve Bank of New York of a paper presented at the Jacques Polak Research Conference -- Financial Frictions and Macroeconomic Adjustment, Washington DC, November 5—6, 2009 http://www.imf.org/external/np/res/seminars/2009/arc/index.htm

1. Discussion of “Do Global Banks Spread Global Imbalances?”
Adam B Ashcraft
Credit, Investment, and Payment Risk

2. Overview of paper
 ABCP conduits ($1.2 trillion in June 2007) were used by global
banks to manufacture “riskless debt” by purchasing the medium-
term private debt of countries with current account deficits using
short-term debt and a bank-sponsored backup line of credit
(section 3.1)
 ABCP conduits were sponsored by both current account surplus
and deficit countries (section 3.2), but were more prevalent in
countries with weaker capital requirements for backup lines of
credit (section 3.3)
 Focusing on the largest publicly-traded banks in the US and
Europe, banks with more ABCP exposure relative to equity
capital had more negative equity returns during August 2007
(section 4)
2

3. Shadow Bank Liabilities
July 2007, estimated
Short Term Long Term
ABCP MTN
$1200 billion $2000 billion
Securities lending LTD
$600 billion $??? billion
Broker-dealer repo Equity
$2500 billion $??? billion
Finance company CP
$400 billion
Total ~ $10,000 Billion
Liquidity puts
$700 billion
3
3

4. Reserve Board
Source: Federal
500
1000
1500
2000
2500
3000
Billion
Nov 1 1995
May 1 1996
Oct 30 1996
Apr 30 1997
M1
Oct 29 1997
Apr 29 1998
Oct 28 1998
Apr 28 1999
Oct 27 1999
Apr 26 2000
CP
Oct 25 2000
Apr 25 2001
Oct 24 2001
Apr 24 2002
Oct 23 2002
Apr 23 2003
Oct 22 2003
Apr 21 2004
Oct 20 2004
Apr 20 2005
Oct 19 2005
Reverse Repo
Apr 19 2006
Oct 18 2006
Apr 18 2007
Oct 17 2007
Apr 16 2008
Oct 15 2008
Apr 15 2009
4
M1 is a bad Proxy for Short Term Funding
Short Term Liabilities: CP, Reverse Repos, M1
500
1000
1500
2000
2500
3000
Billion
2008
Sep 15,
4
Jul 18, 2007

5. Bank deposit rates and money market yields
5

6. ABS Demand by Investor Type
Billions $
2007 2009
(excluding TALF)
SIV lites
18
43 Securities arbitrage conduits
107
50 Prime money market 20
ABS CDO Mezz
72 Enhanced cash accounts
100
SIVs
75 Securities lenders
80
ABS CDO HG
Source:
JP
ABS Demand Collapsed6 6

7. ABS Issuance: Growth and Collapse by Asset Class
350
Other
300
Non-U.S. Residential
250
Mortgages
Student Loans
$ Billions
200
Credit Cards
150
Autos
100
Commercial Real
Estate
50
Home Equity
(Subprime)
0
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Source: Sep-08
7
JP 7

8. Shadow Bank Topology
Balance Sheet for ABS (1)
Good SIVs Bad SIVs SIV Lites
(Limited Purpose Finance Cos.)
$100 billion assets $400 billion assets $50 billion assets
ABCP ~20% AAA-A
AAA-A ABCP ~60% ABCP ~40%
AAA-A (heavy
MTN ~50% (subprime
(no MTN ~30% subprime MTN ~30%
exposure)
subprime) exposure)
LTD ~20% LTD ~0% LTD ~20%
Capital Notes ~15% BBB-B Capital Notes ~15% BBB-B Capital Notes ~10%
levered ~7x levered ~7x levered ~10x
Origination of Loan and ABS Shadow Bank Funding
Multiseller Conduits Term ABS ABS CDOs
(loan accumulators) (SPV, maturity matched) (resecuritization)
$525 billion assets
AAA-A AAA-A AAA-A
Finance Companies and BHCs Loans 100% ABCP Loans MMFs
(loan originators) BBB-B BBB-B (funding)
BBB-B
Parent CF Equity Equity
CD levered ~ ∞ levered 5-10x levered 5-10x
CP
ABCP MTN, MMF
Loans Conduit Single-Seller Conduits
Floaters Shares
ABS (maturity transformators)
MTN, LTD $150 billion assets
Equity
60 days 1 day
Loans 100% ABCP implicit levered
levered ~15x
Balance Sheet for ABS (2)
Securities Arbitrage Conduits Securities Lenders MMFs
$150 billion assets $600 billion assets $50 billion assets
A1 (MMF) MMF
*Hybrid conduits were a AAA-A 100% ABCP AAA-A T-Bonds
tranches Shares
mixture of single-seller,
multiseller and arb
conduits and had $210 in
CP outstanding at the levered ~ ∞ levered ~50x implicit leverage
8
peak.
8

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