Machholz's Blog

What is truth?

Shadow Banking

Finally here is an easy to follow, comprehensive, well researched, and unbiased paper from FRBNY (Tobias Adrian and  Adam Ashcraft) on the so-called shadow banking (many thanks once again to Kostas Kalevras for pointing it out). A few comments:
I. This chart from the paper shows the breakdown of the “traditional” vs. the “shadow” banking market sizes. It is important to point out the precise definition of traditional banking sources of funds.

Traditional Intermediation [sources of funding] refers to net interbank liabilities [banks borrowing from each other]  plus checkable and savings  deposits of depository institutions plus reserves of life insurance companies and pensions  plus [unsecuritized] corporate debt.

Note that a big chunk of shadow banking is comprised of the GSE (Fannie Mae, Freddie Mac), something the mainstream media often misses. Also this does not include government sponsored student loans, which many would classify as shadow banking (and could become a serious issue at some point).
II. The authors may have overemphasized the complexity of the securitization process with the 7 steps (chart below). Yes, in the few years leading up to the financial crisis, with CDO squared, etc., one could potentially count this many steps. But those days are over. Modern securitization usually involves only the first three steps. For example, in CLOs one has the following:

  1. Banks lend to corporations and syndicate those loans.
  2. The CLO manager uses a “warehouse line” to purchase some large portion of the loans needed for the CLO.
  3. A permanent entity is set up, which issues the liabilities (tranches) and…………………………………….

full article at source:

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Author: machholz

I started this Blog to get out of my system the absolute rage that I have for the corrupt politicians and their Banker Buddies. I’m an ordinary guy, married with kids, and have firm opinions of what is right and what is wrong. I’m not afraid to say it even when it makes me unpopular. I reproduce news all manner of articles, but will always confirm the source of the articles; this is a compliment to the source of such news pieces. But if you do not agree with this and you are the original author, I will take down any article when requested to do so. I do not assume that the author of the news articles share with my views, I include news articles to give readers another slant to my views or to illustrate what the mainstream news media say on the relevant topic. The opinions expressed are my own but I do not accept liability for them, If I have offended you or made a factual error please put on record the truth by leaving a comment. In addition, my thoughts and opinions change from time to time...I consider this a necessary consequence of having an open mind. This weblog is intended to provide a semi-permanent point in time snapshot and manifestation of the various memes running around my brain, and as such any thoughts and opinions expressed within out-of-date posts may not the same, nor even similar, to those I may hold today. For the record I am currently an Independent political activist and am not affiliated to any political party

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