A Comparison of the US and European Shadow Banking Systems: What Can We Learn? Antoine Bouveret (European Securities and Markets Authority)

Transcription

1 A Comparison of the US and European Shadow Banking Systems: What Can We Learn? Antoine Bouveret (European Securities and Markets Authority)

2 Outline Defining shadow banking Estimates of US and European shadow banking systems Main features Conclusion

3 Shadow banking: a new concept? A growing interest in shadow banking A growing interest in shadow banking Securities lending ABS, ABCP, securitization Repo MMFs Google trends Note: Number of articles referring to 'shadow banking' or 'financial stability' or 'systemic risk' and the specific components identified above in Business and Consumer Services or Banking and Credit or Accounting and Consulting or Insurance newspapers. Sources: Factiva, ESMA. Note: Search volumes in gogle for "Shadow banking". Based on weekly data indexed at 1 for the peak reached in 18 November 212 and cumulated on a yearly basis. Sources: Google ESMA.

4 Definitions McCulley (27): unlike regulated banks [ ], unregulated shadow banks fund themselves with un-insured commercial paper, which may or may not be backstopped by liquidity lines from real banks. Thus, the shadow banking system is particularly vulnerable to runs Poszar (28): The network of highly levered off-balance sheet vehicles Pozsar et al. (21): financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees FSB (211): a system of credit intermediation that involves entities and activities outside the regular banking system, and raises i) systemic risk concerns, in particular by maturity/liquidity transformation, leverage and flawed credit risk transfer, and/or ii) regulatory arbitrage concerns

5 Features Objective Bank-like activities: liquidity, maturity and credit transformation Without banks safety nets: no deposit guarantee scheme, no lender of last resort Without banks prudential regulations such as capital requirements and Basel III NSFR and LCR Activities rather than entities Leverage Subjective Regular banking system Systemic risk concerns Regulatory arbitrage Flawed credit risk transfer

6 Behold! I have brought you a man Mapping the SBS in practice Pros and cons Additive approach: individual components (ABCP, ABS, repo, MMF ) Subtractive approach: shadow banking defined as a residual (Other Financial Intermediaries as in FSB (212) and ECB (212)) Activities vs entities Gross vs net (Pozsar et al. (212)) Identification: Additive approach: identification of all the components but may miss financial innovation and the systemic part of it, backward-looking Subtractive approach: too encompassing (as leasing corporations part of the SBS?) Regulation: Additive approach provides incentives for regulatory arbitrage Subtractive approach mixes different activities Identified market activities to be regulated (i.e. sec. lending) or rather economic activities (liquidity transformation or collateral intermediation) linked to a market-based credit system (Mehrling (212))?

7 Size of US and EU shadow banking systems US shadow banking system: "real time estimates" (USD tn) European shadow banking system: "real time estimates" (USD tn) ,7 JPMorgan McCulley 5,9 1,9 NY FED 16,1 FSB 23 14,9 14, FSB 31, ECB (EA only) Bouveret 13, 14,4 (211) 12,2 11,8 1,5 ago-7 apr-8 lug-1 dic-11 set-12 dic-1 giu-11 dic-11 giu-12 Misc. approaches NY FED Note: Data for August 27: amounts outstanding of open commercial paper; April 28: repos of broker dealers and hedge funds, ABCP and auction rate securities and tender-option bonds, July 21: liabilities of ABS issuers, GSEs, and MMFs, pool of securities, repo, open commercial paper and securities lending; December 211: liabilities of Other financial intermediaries. Shaded areas refer to estimates of the shadow banking system which were produced significantly after the OFIs approach NY FED Note: Data for December 21: amounts outstanding of ABCP and ABS, size of the repo market, liabilties of MMFs; June 211: liabilities of Other Financial Intermediaires in the euro area. Shaded areas refer to estimates of the shadow banking system which were produced significantly after the observation date. Sources: ICMA, ECB, AFME, ESMA..

8 Size and trends Size of the US and European shadow banking systems Absolute size : USD 14.6tn for the US vs 1.8tn for Europe While the US SBS collapsed, the European SBS remained roughly stable (-3% vs -8%) US EU USD EU (in EUR, rhs) Note: The size of the shadow banking system is proxied by the liabilities of ABS issuers, GSEs and pool securities for the US, open commercial paper (CP), the size of the repo market, securities borrowed by broker dealers (US only) and the liabilities of Money Market Funds (MMF), in USD tn. Sources: Flow of Funds, ICMA, AFME, ECB, ESMA US as a market-based system, while in Europe, banks continue to the be the main source of credit (96% of bank liabilities vs 18%). 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Size of the US and European shadow banking systems, in % of bank liabilities 28 US EU USD Note: The size of the shadow banking system is proxied by the liabilities of ABS issuers, GSEs and pool securities for the US, open commercial paper (CP), the size of the repo market, securities borrowed by broker dealers (US only) and the liabilities of Money Market Funds (MMF), in USD tn. Sources: Flow of Funds, ICMA, AFME, ECB, ESMA

9 Composition Composition of the US shadow banking system: shift to MMFs and GSEs Run on short term markets (repo, CP, securities lending): share decreased from 3% to 19% (-USD 3.2tn) Collapse of the US ABS market partly reduced by GSEs (-2.6tn for private ABS vs +.8tn for GSEs) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % ABS, GSEs MMF Securities lending CP Repo Note: The size of the shadow banking system is proxied by the liabilities of ABS issuers, GSEs and pool securities for the US, open commercial paper (CP), the size of the repo market, securities borrowed by broker dealers (US only) and the liabilities of Money Market Funds (MMF), in % of total. Composition of the European shadow banking system: shift to...abs! Dramatic increase of ABS issuers in the European shadow banking system in 28, from 12% to 26%. Let s take a closer look at securitization 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % ABCP Repo MMF ABS Note: The size of the shadow banking system is proxied by the liabilities of ABS issuers, open commercial paper (CP), the size of the repo market, and the liabilities of Money Market Funds (MMF), in % of total. Sources: ECB, ICMA, FAME, ESMA.

10 Securitization and ratings Ratings of US RMBS (S&P) 8 2 Number of ratings burgeoned in along with activity US ABS: USD 7tn outs. in 27, and RMBS ratings amounted to ~75. Collapse in new ratings in Outstanding ratings New ratings (rhs) 5 Note: Number of ratings for US RMBS,. Sources: CEREP, ESMA. Ratings of European RMBS (S&P) Similar trends in Europe, but smaller in size. EU ABS: USD 3.2tn outs. in 27, with ~31 RMBS ratings Outstanding ratings New ratings (rhs) Note: Number of ratings for European RMBS,. Sources: CEREP, ESMA.

11 The rise and fall Credit ratings of US RMBS (26 vintage, ratings as of end-26) In 26, 93% of US RMBS (26 vintage) were investment grade and 5% were AAA % 15% 13% 14% 7% 6% 5% 4% 3% 2% 1% AAA AA A BBB <BBB % Note: S&P Credit ratings of US RMBS for the 26 vintage. Sources: CEREP, ESMA. Credit ratings of US RMBS (26 vintage, ratings as of end-211) 5Y later, around 5% defaulted and only 4% remained investment-grade, among which 1% were AAA % 47% 18% 6% 5% 4% 3% 2% 1 1% 1% 1% 1% 1% AAA AA A BBB <BBB default withdrawal % Note: S&P Credit ratings of US RMBS for the 26 vintage. Sources: CEREP, ESMA.

12 The rise and fall Credit ratings of European RMBS (26 vintage, ratings as of end-26) In Europe, 92% of RMBS were investment grade, and 42% AAA % 15% 16% 18% 8% 5% 4% 3% 2% 1% AAA AA A BBB <BBB % Note: S&P Credit ratings of European RMBS for the 26 vintage. Sources: CEREP, ESMA. Credit ratings of European RMBS (26 vintage, ratings as of end-211) 5Y later, around 5% defaulted and only 4% remained investment-grade, among which 1% were AAA % 2% 14% 16% 6% 8% % AAA AA A BBB <BBB default withdrawal 5% 4% 3% 2% 1% % Note: S&P Credit ratings of European RMBS for the 26 vintage. Sources: CEREP, ESMA.

13 The role of institutions Collapse of the US ABCP and ABS market, support from GSEs In the US, the ABCP and ABS market collapsed, despite policy action (FED s alphabet soup) GSEs provided some support during the crisis, but also incentives for the expansion of the SBS before the crisis ABS GSEs CP (rhs) 212 Note: Liabilities of ABS issuers,gses are computed as liabilities of GSEs and GSEs pool securities, open commercial paper (CP), in USD bn. Sources: Flow of Funds, ESMA. ABS issuance peaked in 28 in Europe In Europe, issuance of ABS peaked during the crisis. What were the drivers? ABS issuance Note: Issuance of ABS, in EUR bn. Sources: AFME, JPMorgan, ESMA.

14 The role of institutions Unlike FED and BoE, ECB monetary policy framework allowed for a wide range of collateral to be used for repo. Almost all ABS issued in 28 were retained by the issuer ABS issuance peaked in 28 in Europe 99% 98% % 79% 76% 67% Placed Retained retained in % of issuance (rhs) Note: Issuance of ABS, in EUR bn. Sources: AFME, JPMorgan, ESMA. 1% 8% 6% 4% 2% % ABS as collateral used for ECB refinancing operations to be used as collateral for ECB refi operations ECB provided liquidity backstops to ABS issuers (banks)=public safety net ABS posted at the ECB ABS eligible ABS used in % of eligible ABS (rhs) ABS in % of collateral posted at the ECB (rhs) Note: EUR bn. Sources: ECB, ESMA. 45% 4% 35% 3% 25% 2% 15% 1% 5% %

15 Interconnectedness 7-8 US ABS and RMBS issuance perfomed by European institutions European institutions were exposed to the US shadow banking system, as issuers of US ABS and MBS % 12% 1% 8% 6% 4% 2% % ABS issuance In % of all US issuance (rhs) Note: Issuance of ABS, in USD bn. Sources: Dealogic, ESMA. ABCP sponsor location, 27 (Shin, 212) Country/Area USD In % and main issuers of ABCP in USD. Europe % Germany 139 2% UK 92 13% NL 56 8% FR 51 7% US 32 42%

16 Interconnectedness US MMFs exposure to European banks European banks get USD funding from US MMFs Run on European banks from US MMFs, which cut their exposures by 9% on French banks between May- 11 and June-12, resulting in a shortage of USD funding (1bn) Feb-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Euro area banks French banks Note: Exposures of US 1 largest Money Market Funds to European banks, through repos, CD and CP, in USD bn. Sources: Fitch, ESMA. US MMFs exposure to European banks Liquidity backstops provided by Central banks through dollar swaps Feb-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Euro area banks EURUSD Basis swap 1Y (rhs) Note: Exposures of US 1 largest Money Market Funds to European banks, through repos, CD and CP, in USD bn. Sources: Fitch, Thomson Reuters Datastream, ESMA.

17 Conclusions Differences between US and European shadow banking systems partly linked to the institutional framework and the structure of the economy The European shadow banking system did not collapse......but due to interconnectedness, European banks spread the crisis to European financial markets. Monitoring the shadow banking system on a regional/domestic basis is necessary but not sufficient to grasp the structure of the system (more than just an addition!). Looking forward: role of the implementation of new regulations (Dodd-Frank vs EMIR on OTC derivatives) and differences in domestic regulations (ex: CNAV vs VNAV for MMFs).