`
The Shadow Banking System
Conceptualized, designed, and created by Zoltan Pozsar
Borrowers
Loans
Assets
Dollar
Deposits
Loans
Bonds
Equity
Equity
Discount Window
Loan
Collateral
`
Agency Debt Purchases
Agency
Debt
Reserves
Agency MBS Purchases
Agency
MBS
Reserves
11/25/2008
Deposits
Checking
Accounts
Loans
CDs
Depositors
Deposits
Equity Funding
Equity
Real Money Accounts*
Bank Equity
Bank
Equity
Loans
Short- to Long-Term Cash
Money Market " Portfolios"
Checking
ShortAccount
Term
MMDAs
Savings
CDs
Ultimate Creditors
Households, Businesses
and the Rest of the World
Long-Term Investments
Equity Portfolios
Equity Funding
Traditional Banks' Lending Process
Loans
Assets
Commercial Banks
The Traditional Banking System
("Originate-to-Hold-to-Maturity-and-Fund-with-Deposits")
Short-Term Funding
Ultimate Borrowers
Households, Businesses, Governments
Debt Funding
(Short and Long-Term Deposits
The Traditional Banking System
Bank
Equity
Client
Funds
Bank
Equity
Term
Savings
*Asset Managers, Insurance Companies and
Pension Funds
Agency Debt Purchases
Agency
Debt
Reserves
11/25/2008
Reserves
11/25/2008
No
Explicit
Fees
Implicit
Insurance
Implicit
Insurance
Equity
Liability Insurance
(Federal Government)
Step (5): ABS CDO Issuance
ABCP
Loans
Broker-Dealer*
Structuring
and
Syndication
ABCP
2nd Lien
Equity
Consumers
Goods
&
Services
Loans
Finance Company*
CP
ABCP
BDP
Loans
MTNs
Equity
*FHC affiliate
Repos
Haircuts
Multi-Seller Conduit*
(Warehouse and Term)
O/C
1st Lien
Home
Trading Books
AA-BBB
O/C
*FHC affiliated
Single-Seller Conduit
Loans
High-Yield CLOs
(LBO Loans)
A1
AAA
Loans
AA-BBB
Equity
Repo Conduits
Reverse
Repos*
ABCP
O/C
Consumer ABS
(Credit Card ABS)
A1
AAA
Loans
AA-BBB
Equity
*FHC affiliate
ABCP
O/C
Hybrid Conduits
AA-BBB
High-Grade CDOs
Supers
AAA
AA-A
AA-BBB
Equity
Mezzanine CDOs
Supers
AAA
BBB
AA-BBB
Equity
SIV, SIV-Lite
AAA
CP
AA-BBB
LTD
MTNs
Supers
CNs*
*Capital Notes
Arbitrage Conduit
AAA
ABCP
AA-BBB
O/C
LongTerm
Munis
ABCP
ShortTerm
Munis
*ARSs, TOBs, VRDOs
O/C
CRE
Loans
Loans
Hybrid Conduits
(ABS Warehouse Conduits)
ABCP
AA-BBB
O/C
*European bank affiliated
Private Equity
Portfolio Companies
AAA
ABCP
AA-BBB
O/C
Tax
Revenues
Bonds
State Governments
Finance Company*
CP
ABCP
BDP
Loans
MTNs
Equity
*Broker-dealer affiliate
Loans
ABCP
Broker-Dealer*
O/C
State
Bonds
Tax
Revenues
Structuring
and
Syndication
Subprime ABS
(2nd lien, subprime, HELOCs)
A1
AAA
Loans
AA-BBB
Equity
Industrial Loan Company*
Local Governments
Muni
Bonds
Tax
Revenues
Brokered
Deposits
*DBD affiliate
Brokerage
Clients'
Cash
Balances
Equity
*Broker-dealer affiliate
Standalone Finance Company
CP
Single-Seller Conduit
Loans
ABCP
Credit " References"
TLGP
MTNs
Debt
Insurance
Trading Books
AA-BBB
Repos
CMBS and High-Yield CLOs
(LBO Loans)
A1
AAA
Loans
AA-BBB
Equity
Mezzanine CDOs
Supers
AAA
BBB
AA-BBB
Equity
*Broker-dealer affiliate
Industrial Loan Company*
Loans
ABCP
O/C
*Independent conduit
Seniors
*Broker-dealer affiliate
Liquidity Puts*
ShortTerm
Munis
Repos
LPFCs
AAA
AA-BBB
REITs
Credit Insurance
(Monolines)
Credit Insurance
(AIG FP)
Monoline Insurers*
Diversified Insurance Co.
Premia
Credit
Insurance
CPFF
TALF
CP
Reserves
AAA
10/7/2008
Counterparty Hedges
Premia
Equity
*Unaffiliated with originators!
Reserves
ABCP
Warehouse Hedges
CP
MTNs
CNs*
*Capital Notes
LTD
[…]
[…]
Maiden Lane LLC
Reserves
Maiden Lane III LLC
CDS
on
CDOs
Reserves
3/24/2008
10/11/2008
Counterparty Hedges
Warehouse Hedges
Warehouse and
Counterparty Hedges
Direct
Investmen
ts
$1 NAV
ShortTerm
Savings
Shares
LGIPs
A1
CP
ABCP
$1 NAV
Shares
BDP
RRs
Other*
*MMMFs
Ultra-Short Bond Funds
A1
CP
ABCP
$1 NAV
BDP
Shares
RRs
Other*
*ARS, MMMFs, as well as
MTNs and term ABS
Households and N onprofits
Savings:
Excess
Cash
Sweep Accounts
A1
CP
$1 NAV
ABCP
Shares
BDP
RRs
Other*
*ARS, MMMFs
"Equity"
N onfinancial Corporates
Savings:
Excess
Cash
"Equity"
Tri-Party Repo System
Tri-Party Clearing Banks*
Reverse
Repos
ABS
Collateral
Federal, State
and Local Governments
Cash lending
for
securities collateral
Savings:
Excess
Cash
"Equity"
TAF
ABS
ML III, LLC
LSAPs
RoW
(Foreign Central Banks)
AAA
(A2-A3)
Loans
Cash Reinvestment Accounts
A1
CP
ABCP
Cash
Collateral
BDP
RRs
Other*
*MMMFs, MTNs, term ABS and
TOBs and VRDOs
Cash Reinvestment Accounts
A1
CP
Cash
ABCP
Collateral
BDP
RRs
Other*
*MMMFs, MTNs, term ABS and
TOBs and VRDOs
Agency
Debt
ABS
*Medium-term debt
Long-Term nstruments (LTD)
Long-Term Debt
Private
LTD
Agency
LTD
Securities
Lent
*Done by real money accounts
on a principal basis.
Bonds*
*Issued to central banks
in exchange for investibe FX
Long-Term Savings
Fixed Income Portfolios*
MTNs
Term
LTDs
Savings
CNs
*Bank, Shadow Bank
and Corporate Debt
Equity Portfolios*
Public
Equity
Term
Savings
*Mutual Funds, ETFs, Separate Accounts
*Bank and Corporate Debt
Pension Funds, Insurance Companies*
Cash
MTNs
LTD
Pension
Equity
Liabilities
CDOs
HG
ABS
Mezz
ABS
RoW
(Sovereign Wealth Funds)
Savings:
Export
"Equity"
Revenue
FX
Reserves
Securities Lending*
Cash
Collateral
Structured
Credit
ABS
A4 and AA-BBB ABS Tranches
AAA
(A4)
Loans
AA-BBB
Securities
Lent
Asset Managers*
Cash
MTNs
LTD
Client
Funds
Equity
Loans
Local
Currency
Securities Lending*
Cash
Collateral
*Done by custodian banks
on an agent basis.
Principal Securities Lending
Agency Debt*
Loans
Savings:
FX
Reserves
Agent Securities Lending
Private
MTNs
A2 & A3 (AAA) ABS Tranches
FX Swaps
Reserves
12/12/2007
$
Structured
Credit
Super
Senior
Super
Senior
*Public and Private Pension Funds,
and Life and P&C Insurance Companies
Structured Credit Portfolios*
Debt
Tranches
Term
Savings
Equity
Tranches
*Term ABS and CDO
debt and equity tranches
Loans
ABS
Equity
Structured Credit Equity
ABS
Loans
and
CDO
ABS
Equity
Alternative Asset Managers*
Cash
MTNs
Client
LTD
Funds
Equity
*Hedge Funds and Private Equity
(only credit exposures)
TSLF/ PDCF
Tri-Party
Collatera
l
FX
Reserves
3/11/08 and 3/16/08, respectively
12/12/2007
AMLF
ABCP
Reserves
9/19/2008
MMIFF
Nonrepo MM
Reserves
instrume
nts
10/21/2008
Maiden Lane II LLC
Subprim
e ABS
Reserves
RMBS
11/10/2008
Synthetic Credit Liabilities
Bond(s)
Households, Businesses, Governments
Loans
Assets
Bonds
Equity
CDS
Single-N ame and Index
Sovereign CDS
Bond(s)
Funded
Protection
CDS
[…]
Equity
Equity
*Referencing corporate loan indices, etc.
Broker-Dealers*
Counterparty Hedges
Warehouse Hedges
Protection
Bought
Protection
Sold
AAA
Counterparty Hedges
Warehouse Hedges
Warehouse Hedges
Credit Hedge Funds
Unfunded
Protection
Funded
Protection
Short-Term Synthetic Liabilities
CPDOs*
Protection
Sold
CDS
Structured Credit and Loan
CDS Indices
Loan(s)
CDPCs
Unfunded
Protection
*Market Makers
Protection
Sold
Equity
Source: Pozsar, Zoltan, Tobias Adrian, Adam Ashcraft, and Hayley Boesky. “Shadow Banking.” Federal Reserve Bank of New York Economic Policy Review 19, no. 2 (December 2013).
Funded Synthetic CDOs*
(Credit-Linked Notes)
AAA
AAA
AA-BBB
Equity
Referencing ABS and single-name CDS
indices, etc.
Treasurys
Unfunded Synthetic CDOs*
[…]
AAA
AA-BBB
Equity
*Referencing single-name CDS indices, etc.
Private Risk Repositories
Single-N ame and Index
Corporate CDS
The " Synthetic" Shadow Banking System
(Derivatives-Based Risk Repositories)
Ultimate Borrowers
Federal Reserve
DW
TAF
FX Swaps
TSLF
TSLF
PDCF
CPFF
TALF
AMLF
Reserves
MMIFF
ML, LLC
ML II, LLC
*BoNY and JP Morgan Chase
Public Equity
Equity
*Unaffiliated with originators!
Warehou
sed ABS
Short-Term Savings
Money Market Portfolios
Credit Insurance
(AIG FP)
Credit
Insurance
(Par Puts)
11/25/2008
Bank Treasurers
A1
CP
$1 NAV
ABCP
BDP
Shares
RRs
Other*
*ARS, MMMFs
Enhanced Cash Funds
A1
CP
ABCP
$1 NAV
BDP
Shares
RRs
Other*
*ARS, MMMFs, as well as
MTNs and term ABS
BDPs
Loans
MTN s
AAA
Credit Insurance
(Mortgage Insurers)
Credit
Insurance
BDPs
ABS
Credit Hedge Fund
Mortgage Insurers*
Premia
Offshore (non-2a-7) MMMFs
A1
CP
ABCP
$1 NAV
BDP
Shares
RRs
Other*
*TOBs and VRDOs
ABCP
Loans
Asset Manager,
Prime Broker
AA-BBB
Middle-Market CLOs
(Loans to SMEs)
A1
AAA
Loans
AA-BBB
Equity
Brokered
Deposits
Equity
*Finance company affiliate
ABCP
Loans
2a-7 MMMFs
A1
CP
$1 NAV
ABCP
BDP
Shares
RRs
Other*
*TOBs and VRDOs
CP
$1 NAV
ABCP
Shares
RRs
Other*
*ARS, MMMFs
Equity
Trading Book
Super
Seniors
Repos
Super
LongTerm
Munis
Other ABS
(Floorplan, Equipment, Fleets)
A1
AAA
Loans
AA-BBB
Equity
Equity
*Unaffiliated with originators!
The "Synthetic" Shadow Banking System
Mezz
ABS
Mezz
CDO
Euro
Deposits
Haircuts
Multi-Seller Conduit*
("Rent-a-Conduit")
O/C
Loans
Captive Finance Company
CP
ABCP
BDP
Loans
`
MTN
LTD
Equity
Repos
AA-BBB
*ARSs, TOBs, VRDOs
MTNs
Equity
AAA
High-Grade CDOs
Supers
AAA
AA-BBB
Equity
AA-A
Consumer ABS
(Card, Auto, Student Loan)
A1
AAA
Loans
AA-BBB
Equity
ABCP
Loans
Credit Hedge Fund*
Haircuts
Broker Sweep Accounts
Brokered
Deposits
Loans
[…]
CP
ABS
Ultimate Creditors
Corporate Treasurers
Cash " Plus" Funds
A1
CP
ABCP
$1 NAV
BDP
Shares
RRs
Other*
*ARS, MMMFs, as well as
MTNs and term ABS
Medium-Term Instruments
RMBS
(1st lien, private label)
A1
AAA
Loans
AA-BBB
Equity
Single-Seller Conduit
Equity
Private Risk Repositories
Treasury
Bonds
Tax
Revenues
Governments
Euro
Deposits
Europe an Banks
Arbitrage Conduit
Federal Government
[…]
Mezz
ABS
Mezz
CDO
ABCP
O/C
LBO
Loans
Firms
Off-Balance Sheet
Multi-Seller Conduit*
(Warehouse and Term)
Businesses
CRE
Bonds
Equity
Off-Balance Sheet
Loans
Assets
SIV
AAA
CP
AA-BBB
LTD
MTNs
Supers
CNs*
*Capital Notes
C&I
Loans
Off-Balance Sheet
N onfinancial Businesses
Europe an Banks
Off-Balance Sheet
Investments
A1
CP
Asset Manager*
Businesses
Loans
Loans
*BHC affiliate
Liquidity Puts*
A1 (AAA) ABS Tranches
Wholesale Funding
(Medium-Term Funding)
Subprime Homeowners
Loans
Direct Money Market Investors
A1
Liquidity Puts
ARSs
Munis
TOBs
or
ABS
VRDOs
Wholesale Funding
(Term Debt Funding)
Loans
Subprime, RMBS, CMBS
A1
AAA
Loans
AA-BBB
Equity
Single-Seller Conduit
Unregulated Money Market
Intermediaries
Agency
Bills
ABS
Provision of Risk Capital
Equity
Households
Assets
Commercial Bank*
Dollar
Deposits
Loans
ABCP
Repo
Securities
LTD
Equity
*FHC affiliate
European Banks' Shadow Banking Activites
1st Lien
Home
DBDs' Credit Intermediation Process
" Prime" Homeowners
The GSEs' Credit Intermediation Process
A1
AAA
AA-BBB
Equity
*Conforming SBA loans
The Government-Sponsored Shadow Banking System
(Public Originate-to-Distribute Model)
FHLBs
(Retained Portfolios)
Agency
Discount
MBS
Notes
Private
Agency
ABS
Debt
SBA ABS
Loans*
Federal Government
FHCs' Credit Intermediation Process
Equity
Loans
Off-Balance Sheet
Agency
Debt
Regulated Money Market
Intermediaries
Agency Discount N otes
Off-Balance Sheet
Loans
Fannie and Freddie
(Retained Portfolios)
Agency
Discount
MBS
Notes
Private
Agency
ABS
Debt
FFELP ABS
A1
AAA
Loans*
AA-BBB
Equity
*Conforming student loans
Step (7): Wholesale Funding
(Shadow Bank "Depositors")
Short-Term Debt Instruments
CMO
Tranches
Off-Balance Sheet
FH LBs
Discount
Notes
Agency
MBS
Implicit
Insurance
Insurance
Guarantees
CMOs
(Time-Tranched Agency MBS)
Agency MBS
Agency
PassLoans*
Through
s
*Conforming mortgages
Off-Balance Sheet
TBA
Market
Insurance
Premia
9/18/2008
*Funded by UST's $50 billion
Exchange Stabilization Fund
Catalogue: ,
Shadow Bank Liabilities
On -Balance Sheet
ABS Intermediation
Off-Balance Sheet
Fannie and Freddie*
PBGC
MMMF
Insurance
Liability Insurance
(EU Government)
Step (6): ABS "Intermediation"
Off -Balance Sheet
ABS Intermediation
Ultimate Borrowers
Temporary
MMMF Guarantee
No
Explicit
Fees
Credit Hedges
Step (4): ABS Warehousing
Wholesale Funding
(Short-Term Funding)
Credit Insurance
(GSEs, DoE, SBA)
Step (3): ABS Issuance
The " Internal" Shadow Banking System
(Private Originate-to-Distribute Model)
Liability Insurance
(Federal Government)
Step (2): Loan Warehousing
The " External" Shadow Banking System
(DBDs: Originate-to-Distribute Model | Independent Specialists: Originate-to-Fund Model)
Deposit Insurance
(FDIC)
Step (1): Loan Origination
Independent Specialists' Credit Intermediation Process
The "Cash" Shadow Banking System
Wholesale Funding
(Overnight Funding)
No
Explicit
Fees
Implicit
Insurance
(Tail Risk Absorption)
No
Explicit
Fees
Implicit
Insurance
Private Credit Transformation
No
Explicit
Fees
Public Risk Repositories
(Tail Risk Absorption)
European Sovereign and
Quasi-Sovereign States
Federal Government
Federal Government
Deposit
Insurance
Public Risk Repositories
GSEs, DoE, SBA
FDIC
Insurance
Premia
Public Credit Transformation
(Tail Risk Absorption)
Deposit Insurance
(FDIC)
Loans,
ABS
and
CDOs
Funded
Protection
Long-Term Synthetic Liabilities
Loans,
ABS
and
CDOs
Funded
Protection
Broker-dealer CVA desks, ABS pipeline hedges,
negative basis traders, real money accounts, etc.
Speculators*
Counterparty Risks*
Loans,
ABS
and
CDOs
Hedgers*
Insured
Assets
Unfunded
Protection
*Inability to meet
unfunded liabilities, etc.
"Naked"
Positions
Portfolio Protection*
Hedges
Term
Savings
*Hedging Motives
Synthetic Exposures*
Credit
Bets
Term
Savings
*Speculative Motives
Proprietary trading desks, credit hedge funds, etc.
Ultimate Creditors
Households, Businesses, Governments
and the Rest of the World (RoW)
OMO
Collatera
l
Equity