Former U.S. Secretary of the Treasury Timothy F. Geithner and Professor Andrew Metrick survey the causes, events, policy responses, and aftermath of the recent global financial crisis.
Lecture: Shadow Banking
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Del curso dictado por Yale University
The Global Financial Crisis
1129 calificaciones
Conoce a los instructores
Andrew MetrickMichael H. Jordan Professor of Finance and Management
Yale School of Management
Timothy GeithnerLecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
Yale School of Management
[MUSIC]
We begin this module with a discussion of shadow banking.
Which is a review of a discussion that we had in an earlier module, where we had
less information at that time about what the components of shadow banking were.
Let's look again at the picture that we saw in the earlier module.
And this is a figure that shows on balance sheet financing.
This is traditional banking and
traditional banking is really quite easy to understand.
We have a depositor who has the cash, the depositor hands the money to a bank, as
long as this amount of money is below the limit in the United States, for example,
that is insured, then those savings or checking account will be insured.
And that's the arrow that goes back to the depositor.
So we have the dollars going from the depositor to the bank.
And then we have insured account going back to the depositor.
The bank will then loan out those dollars to a borrower,
say for a mortgage or for a small business loan, and
the asset the bank will get in return will be the loan itself.
So they'll be able to collect on that loan over time.
This is nice simple banking.
And the key step here that lead to a lower frequency of panics
was the insurance of savings, that we see in that top step.
Now things change over time, and now in figure two we're gonna see a picture of
shadow banking, off-balance-sheet financing.
And now, with a bit more specificity than we examined when we first
did this in the module on safe assets and the global savings glut.
Here I've filled in some of the boxes that were generalized there
with some specific actors.
We're going to start again as we did in the previous picture
with retail investors.
And they're in the top left corner.
And the retail investors, now instead of giving their money directly to a bank,
are going to hand it over to a money market mutual fund.
That's MMMF.
And perhaps the reason the reason they're doing that is that these retail investors
are very large investors.
They have a lot of money that would exceed
the levels that would be protected under insurance from the FDIC.
The retail investors hand dollars over to the money market mutual funds and,
technically, what they receive back are shares.
So a money market mutual fund is not technically a bank but
rather a fund that sells shares.
And they receive back those shares from the money market mutual fund.
And typically, and absolutely at this time for
retail investors, if you gave a dollar to a money market mutual fund,
they would just keep the value of your investment at a dollar at all times.
If the value of investment fell slightly below a dollar,
they were allowed to continue to say it was a dollar until it fell by too much.
If it fell by too much, then either the sponsor of the money market mutual fund
would themselves have to prop up the fund by putting money in, or they would have to
admit it had fallen below a dollar, something called breaking a buck.
That's something that really we would never see happen
until the financial crisis.
So our first step is similar in that we have retail investors
giving money to a financial institution.
But now the financial institution is a money market mutual fund,
which stands between the investors and, ultimately, some kind of bank.
So that's step two.
The money market mutual fund hands money over to the bank, and
the bank, what they give back to the money market mutual fund is no longer
a savings account or a checking account, but rather, they give back collateral.
And they give back collateral because were to say well, this is a checking account or
a savings account and you have an account with us now, it would not be insured.
Money market mutual fund that's making a deposit of $50 million or
$100 million with the bank, wants to make sure they're gonna get their money back.
And since insurance doesn't cover that, what they're gonna ask for is collateral.
And this transaction, in step 2, is something called the sales and
repurchase agreement or goes by the shorthand of just repo.
And in repo, effectively the money market mutual fund takes
legal title to the collateral, hands over the money, and
if they don't get their money back, they just keep their collateral.
This can happen through a variety of other steps as well.
For example, the bank may not have enough collateral
in order to give it over to the money market mutual fund.
What they have on their balance sheet perhaps are actual loans.
So what they do, in step 4, is they'll go back and forth
between securitization, which is what we studied earlier in an earlier module,
create from the raw material of the loans forms of asset-backed securities,
mortgage-backed securities,
that they can use as collateral, bring them back onto their balance sheet and
then exchange them for the money market mutual funds and repo in step 2.
They get those loans on their balance sheet in the first place by taking all
the dollars that they have received from the money market mutual funds in step 2,
and handing them over to borrowers in return for loans.
So, step 3, where banks are interacting with borrowers,
is identical to the step B that we see in this diagram, where banks and
borrowers are interacting in step B for loans.
In shadow banking, that step B becomes step 3, where loans and
dollars are being exchanged between banks and borrowers.
The banks now, however, instead of just keeping them on their balance sheets
are interacting with step 4 to create securitizations,
to receive back in return bonds, and to be able to use those bonds as collateral for
their money market mutual funds.
Money market mutual funds may also be purchasers directly of this collateral.
We see that in step 5, where they just buy from the securitization
vehicles directly, the bonds, and give cash over.
That cash would then get recycled back to the bank in the same way.
So by this method, the banks are managing to finance all of the activity
that they're doing with borrowers, but they're doing it through multiple steps.
And those multiple steps are necessary because nobody will give
the bank the amount of money that they need to do this on an uninsured basis.
They have to come up instead with a clever way to promise that that money
will eventually get back to the ultimate investor.
Now what we have in these boxes could be replaced.
Money market mutual funds are one possible financial
intermediary that could be taking money from retail investors.
But in general, you can think of that box as being any large institutional cash
pool of the type that we studied in the module on the global savings glut.
Any place that there is a large amount of money, where some of that investment
we would like to be safe, if it's our money we'd like some of it be safe.
We can't just hand it to an institution on an uninsured basis so
we're going to get collateral for it.
So that's what we could see there.
What we call a bank here, which in the commercial banking
world we understand well, in this world could be any financial institution that is
engaged in making loans to borrowers, warehousing those loans, and
recycling them, either out to the large institutional pools, as collateral,
or taking it through securitization first, and then recycling it as collateral.
So a bank, here, could be an investment bank, or
a very large insurance company, or a traditional bank.
It would not have to follow the same rules for
depositors as would the traditional banks that we saw in the previous figure.
The key thing to recognize here is that off-balance sheet financing is serving
the same economic function as the on-balance sheet financing.
Shadow banking is banking.
And it can run in to the same types of problems that banking can,
which is exactly what we will see happen in the panic.
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