Financial Sector Evolu0on in the New Regulatory Environment

Transcription

1 Financial Sector Evolu0on in the New Regulatory Environment Darrell Duffie Stanford University FRBNY Financial Advisory Roundtable June 6, 2014

2 Capital and Liquidity Provision ULTIMATE USER OF CAPITAL (ISSUER- BORROWER) BANK INVESTMENT COMPANIES (CLO- SPV, ETF, Mutual Fund, Hedge Fund, REIT, BDC, PE, VC) UI UI UI UI UI ULTIMATE INVESTORS UI UI

3 other trading credit provision with maturity transforma0on underwri0ng market making hedging payment and seylement Volcker boundary of U.S. banking system

4 Policy changes affec0ng market structure Bank capital and liquidity rules (Basel, CCARs) Bank ac0vity limits (Volcker, merchant banking) Deriva0ves market compe00on, transparency Collateral, central clearing, counterparty limits Monetary policy (ZLB, LSAP, RRP)

5 Frac0on of U.S. Private Credit Provided by Banks 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Data Source: Federal Reserve, BIS, adjusted for breakpoints

6 Annual Growth Rate of U.S. Private Credit Provided 20.00% By non- banks By banks 15.00% 10.00% 5.00% 0.00% % % % Data Source: Federal Reserve, BIS, adjusted for breakpoints

7 Exhibit 12 Historical and forecast Wholesale industry revenue pools E, $BN Total Revenues ($BN), GDP (Index 2000=100) '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 IBD Equities Credit FX/EM/Commod Rates Writedowns/losses Bear ROE (%) Source. Oliver Wyman analysis

8 Secondary Market Architecture U6 U3 U4 U4 U5 asset manager D2 D1 U4 U6 U5 D3 U5 U6 E U3 U2 E D U1 U2 U1 direct exchange U2 U1 asset manager OTC (dealer as principal) U3 agency intermedia7on

9 U3 Hybrid OTC Market Approaches TF D2 D1 U1 asset manager TF D3 TF U2 U5 U4 OTC mul7lateral trading facili7es (swap execu7on facility, bond trading pla>orm)

10 Who handles the bonds? Bond Fund+ETF Dealer Bonds Financed Assets (billion USD) Data sources. ICI: AUM, bond mutual funds + ETFs. FRBNY: primary dealer daily financing (securi0es out) of UST + agencies + MBS + corporate bonds (first quarter).

11 400 How are REIT assets growing? Agency assets Repo liabili0es 350 Amount (billion USD) Data source: Flow of Funds L127

12 120 Larger Business Development Companies 100 Fijh Street Debt/Equity (percent) TICC Hercules TG Pennant Park Main Street BlackRock Kelso Apollo Prospect Ares 20 Solar Capital Assets (billion USD) Data source: StreetAuthority

13 Dealers and Hedge Funds $ Fixed Income Hedge Fund AUM Dealer Corp Bond Inventory $ Asset level (billions) $ $ $ $ $50.00 $- Data sources. Dealer inventories: FRBNY (March). Fixed income hedge funds AUM (Barclay)

14 Average daily bond market turnover Daily volume/outstanding (percent) Municipal bonds Corporate bonds Data source: SIFMA

15 Average Daily Trading Volume ($ billions) Trading volume US10YR MBS CORP Data Source: Campbell, Li, Im (2014) BrokerTec: US10YR. TRACE: MBS 30yr FNMA TBA 3%, 3.5%, 4%. CORP 100 most traded IG.

16 UST10yr: Volume and Vola0lity 10YR- VIX VOLUME/ /16/11 7/16/11 9/16/11 11/16/11 1/16/12 3/16/12 5/16/12 7/16/12 9/16/12 11/16/12 1/16/13 3/16/13 5/16/13 7/16/13 9/16/13 11/16/13 Data sources: CME: UST10yr- VIX. BrokerTec: UST10yr daily volume ($ billions).

17 Liquidity before and after financial crisis Liquidity supply E[L ij ] = X i γ j : Price of Liquidity p j = E[X i β j ] E[X i γ j ] : 3.0# 2.5# 2.0# 1.5# 1.0# 0.5# 0.0# 3.0# 2.5# 2.0# 1.5# 1.0# 0.5# 0.0# Opaque######## (Feb983Jan05)# Opaque######## (Feb983Jan05)# Central dealers affected the most by transparency All dealers affected by crisis Transparent### (Feb053Aug08)# Transparent### (Feb053Aug08)# Crisis########## (Sep083Dec12)# Crisis########## (Sep083Dec12)# Dan Li and Norman Schürhoff Dealer Networks: Market Quality in OTC Markets 27

18 Daily Average Volume: Interest Rate Deriva0ves 1600 US- OTC US- EXCH UK- OTC Daily average volume ( $ billions) Data sources. BIS: OTC Triennial (April), U.S. exchanges Table 23A (March).

19 A 100 B A B C 10 C Central clearing and trade compression are reducing outstanding deriva0ves posi0ons.

20 Amount y of riskier asset Risk- weighted assets are limited by available capital c. Amount x of safer asset

21 Amount of risky assets The leverage rule could be distor0onary, by penalizing safe assets rela0ve to risky assets. Amount of safe assets

22 Poten0al adverse policy implica0ons 1. Growth of risky non- bank- affiliated intermediaries. 2. Ability to safely resolve the failure of new systemic market infrastructure. 3. Uncertainty regarding the efficiency of SEFs/MTFs. 4. Implementa0on costs (compliance fric0ons). 5. Atrophied ability of banks to act as shock absorbers? 6. Market distor0ons under gross leverage constraints. 7. Reaching for yield (distor0ons and risks). 8. Implica0ons of new monetary tools such as RRP facility for private monitoring efficiency and run risk. 9. New difficul0es with interna0onal rule harmoniza0on.

23 Posi0ve policy implica0ons Increased financial stability (in most respects). Increased ability to compete with large banks and bank affiliates, with associated efficiency benefits. Addi0onal effec0ve monetary policy tools. Increased market transparency.