1. Shadow Banking

2. Traditional Banking – Everything on One Balance Sheet, Under One Roof
Create/issue very short-term liabilities and create/but long term assets

3. Term “shadow banking” has been attributed to economist and money manager Paul McCulley
Describes a large segment of financial intermediation that are outside the balance sheets of regulated commercial banks and other depository institutions.
Conduct functions of banking “without access to central bank liquidity (Fed discount window) or public sector credit guarantees (FDIC)”.

5. 2. Warehouse Bank 2. 3. 4. 5. 1. Loan Originator:
commercial bank, finance company, mortgage bank, …
mortgage, auto, credit card loans, ..
2. Warehouse Bank 2. 3. 4. 5.

6. Shadow Banking System
CP, ABCP, Repo
Originator:
Originates
a loan: auto, student,
mortgage
Commercial Bank
Mortgage Company
Finance Company such as Ford motor Credit
Aggregator:
Could be:
the Originator
An investment bank
A large Commercial
Bank
They form pools
and securitize
the loans
SPV
Securitized ABCP
Loans or
REPO
MMMF
Loan
doc.
sell loans
$$$
Shares
$$$
Repo
Investors:
Any entity that has large amounts of cash they want to park for short period of time
$$$
$$$
$$$
Take long-term assets and transform into very short-term liabilities.

8. Balance Sheets of Securities Firms and Investment Banks
Note that large amounts of receivables represents trading activity
Receivables represent trading activity, about 30% of assets.
Long position (investments), about 24% of assets
Purchase side of Repo, 34%. Lending short-term on the repo market. 8

9. 45% of source of financing is short-term repo. Equity is low at 4.46%.
Note that large amounts of receivables represents trading activity
45% of source of financing is short-term repo.
Equity is low at 4.46%. 9