Shadow Banking

Shadow Bankers

Asset management firmsBank holding companiesBanks, investmentBanks, traditionalCompanies, publicCompanies, private Exchange-traded fundsHedge fundsInsurance companies Money market fundsMunicipalities

Mutual fundsPension plansPrivate equity firmsSecurities dealersSecurities lendersSecuritizing firmsSovereign wealth fundsUniversity endowmentsFannie Mae and Freddie MacFederal Home Loan BanksFederal Reserve and other central banks

Five steps of shadow banking

• 1. Make loans.

• 2. Make securities.

• 3. Sell securities.

• 4. Insure securities.

• 5. Keep securities to lend and repo.

Six shadow banking transactions

• 1. Asset-backed securities - ABS• 2. Collateralized debt obligations - CDO• 3. Asset-backed commercial paper - ABCP• 4, Credit default swaps - CDS• 5. Securities lending - SecLend• 6. Repurchase agreement - Repo

Steps of shadow banking1. Make loans.2. Make securities.3. Sell securities.4. Insure securities.5. Keep securities to lend and repo.

Transactions of shadow banking1. Asset-backed securities - ABS2. Collateralized debt obligations - CDO3. Asset-backed commercial paper - ABCP4, Credit default swaps - CDS5. Securities lending - SecLend6. Repurchase agreement - Repo

Shadow bank lending

Aircraft leasesAuto loansAuto leasesCommercial real estateComputer leasesConsumer loansCredit card receivablesEquipment leasesEquipment loans

Franchise loansHealthcare receivablesHealth club receivablesHome equity loansInsurance receivablesIntellectual property cash flowsManufactured housing loansMortgages, commercialMortgages, residential

Motorcycle loansMusic royaltiesRV loansSmall business loansStudent loansTrade receivablesTime share loansTax liensViatical settlements

From “Securitization” by Yale University professors Gary Gorton and Andrew Metrick.

Steps of shadow banking1. Make loans.2. Make securities.3. Sell securities.4. Insure securities.5. Keep securities to lend and repo.

Securitizing firms-Conduit-Special purpose entity - SPE-Special purpose vehicle - SPV-Structured investment vehicle - SIV-Trust-Variable interest entity - VIE Transactions of shadow banking

1. Asset-backed securities - ABS2. Collateralized debt obligations - CDO3. Asset-backed commercial paper - ABCP4, Credit default swaps - CDS5. Securities lending - SecLend6. Repurchase agreement - Repo

“Quick. Take my security and give me money.”

Shadow bankersAsset management firmsBank holding companiesBanks, investmentBanks, traditionalCompanies, public and privateExchange-traded fundsHedge fundsInsurance companies Money market fundsMunicipalitiesMutual fundsPension plansPrivate equity firmsSecurities dealersSecurities lendersSecuritizing firmsSovereign wealth fundsUniversity endowmentsFannie Mae and Freddie MacFederal Home Loan BanksFederal Reserve and other central banks

Steps of shadow banking1. Make loans.2. Make securities.3. Sell securities.4. Insure securities.5. Keep securities to lend and repo.

Transactions of shadow banking1. Asset-backed securities - ABS2. Collateralized debt obligations - CDO3. Asset-backed commercial paper - ABCP4, Credit default swaps - CDS5. Securities lending - SecLend6. Repurchase agreement - Repo

Shadow bank lendingAircraft leasesAuto loansAuto leasesCommercial real estateComputer leasesConsumer loansCredit card receivablesEquipment leasesEquipment loansFranchise loansHealthcare receivablesHealth club receivablesHome equity loansInsurance receivablesIntellectual property cash flowsManufactured housing loansMortgages, commercialMortgages, residentialMotorcycle loansMusic royaltiesRV loansSmall business loansStudent loansTrade receivablesTime share loansTax liensViatical settlements

Securitizing firms-Conduit-Special purpose entity - SPE-Special purpose vehicle - SPV-Structured investment vehicle - SIV-Trust-Variable interest entity - VIE

To Recap