Financial Intermediation and the Post-Crisis Financial System

Transcription

1 Fnancal Intermedaton and the Post-Crss Fnancal System Hyun Song Shn 8 th BIS Annual Conference Basel, June 25-26, 2009

2 Outlne Lessons on fnancal system archtecture from global fnancal crss Implcatons for Sze of fnancal sector relatve to real economy Securtzaton Fnancal regulaton Accountng standards Monetary polcy

3 Stylzed Fnancal System ultmate borrowers ultmate clam holders Households Nonfnancal frms govt drect credt Treasury & muncpal bonds corporate bonds Households Penson funds Insurance companes Rest of world

4 Stylzed Fnancal System ultmate borrowers ultmate clam holders Households Nonfnancal frms govt ntermedated credt mortgages corporate credt Bankng (ntermedary) sector drect credt Treasury & muncpal bonds corporate bonds equty debt clams deposts fnancal paper MBS, ABS Households Penson funds Insurance companes Rest of world

5 18.0 US Fnancal Intermedares Total Assets (2007Q2) GSE 3.2 $ Trllon GSE Mortgage Pools 4.5 Fnance Co. 1.9 Commercal Banks Broker Dealers ABS Issuers 4.1 Savngs Inst Market-Based Credt Unons 0.8 Bank-Based

6 Holdng of US Home Mortgages by Type of Fnancal Insttuton Agency and GSE mortgage pools ABS ssuers Savngs nsttutons Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 $ Trllon 2002Q1 2004Q1 2006Q1 2008Q1 GSEs Credt unons Commercal banks

7 Market-Based and Bank-Based Holdng of Home Mortgages Market-based Bank-based Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 $ Trllon 2 1 0

8 Short Intermedaton Chan mortgage deposts households mortgage bank households

9 Long Intermedaton Chan households households mortgage MMF shares mortgage pool money market fund MBS ABS ssuer ABS securtes frm Repo Short-term paper commercal bank

10 What Are the Advantages of the Long Intermedaton Chan? Securtzaton enables dsperson of credt rsk Long chans promote more effcent maturty transformaton Households want short, lqud clams Shadow bankng system gves them what they want

11 But Evdence n ths Crss Ponts the Other Way Securtzaton has concentrated rsks n leveraged sector Bggest growth n short-term debt was between fnancal ntermedares Fnancal ntermedares have become more ntertwned CoVaR Adran and Brunnermeer (2009)

12 Exposure to Subprme Total reported sub-prme exposure (US$bn) Percent of reported exposure Investment Banks 75 5% Commercal Banks % GSEs 112 8% Hedge Funds % Insurance Companes % Fnance Companes 95 7% Mutual and Penson Funds 57 4% Leveraged Sector % Unleveraged Sector % Total 1, % Source: Greenlaw, Hatzus, Kashyap and Shn (2008)

13 Overnght repos, Fnancal CP and M2 (weekly, July as base date) Mar Aug Apr Overnght repo 2.37 Fnancal CP Jan Jun Dec May Nov May Oct Apr Sep Mar Aug Feb Jul Jan Jul Dec Jun Nov May Oct Apr Sep Mar Aug Feb Aug Jan Jul M2

14 Apr Aug Aug Sep Sep % 30% 40% 50% 60% 70% 80% 90% Jul41990Jan301991Aug281991Mar251992Oct211992May191993Dec151993Jul131994Feb81995Sep61995Apr31996Oct301996May281997Dec241997Jul221998Feb171999Sep151999Apr122000Nov82000Jun62001Jan22002Jul312002Feb262003Sep242003Apr212004Nov172004Jun152005Jan112006Aug92006Mar72007Oct32007Apr302008Nov262008Repos and Fnancal CP as Fracton of M2 (weekly) Source: Adran and Shn (2009)

15 US Insttutons CoVaR IMF Co-Rsk Measures (March 2008) Source: IMF GFSR (Aprl 2009)

16 Mult-layered Fnancal System Source: Haldane (2009)

17 Global Interconnectedness Source: Haldane (2009)

18 Relatve Sze of Intermedary Sector

19 Total Assets of Four Sectors [March 1954 =1] 2006Q3 2004Q1 2001Q3 1999Q1 1996Q3 1994Q1 1991Q3 1989Q1 1986Q3 1984Q1 1981Q3 1979Q1 1976Q3 1974Q1 1971Q3 1969Q1 1966Q3 1964Q1 (Source: Federal Reserve, Flow of Funds) 1961Q3 1959Q1 1956Q3 1954Q Non-fnancal corporate Households Securty Broker Dealers Commercal Banks

20 Non-fnancal corporate Households 2008Q1 Total Assets (Log Scale) [March 1954 =1] 1980Q1 2005Q1 2002Q1 1999Q1 1996Q1 1993Q1 1990Q1 1987Q1 1984Q1 1981Q1 1978Q1 1975Q1 1972Q1 1969Q1 1966Q1 1963Q1 (Source: Federal Reserve, Flow of Funds) 1960Q1 1957Q1 1954Q Securty Broker Dealers Commercal Banks

21 Procyclcal Leverage of Fve US Investment Banks Total Asset Growth (% Quarterly) Leverage Growth (% Quarterly) Source: Adran and Shn (2007)

22 US Prmary Dealer Mean Leverage 26 6/30/1987 9/30/ /30/2007 Leverage /30/

23 All Prmary All Dealers - Through Mean 2008Q4 Leverage 40 3/30/ Leverage

24 New Issuance of Asset Backed Securtes n Prevous Three Months 350 Other 300 Non-U.S. Resdental Mortgages 250 Student Loans Credt Cards Autos $ Bllons 100 Commercal Real Estate 50 Home Equty (Subprme) 0 Sep-08 Mar-08 Sep-07 Mar-07 Sep-06 Mar-06 Sep-05 Mar-05 Sep-04 Mar-04 Sep-03 Mar-03 Sep-02 Mar-02 Sep-01 Mar-01 Sep-00 Mar-00 Source: JP Morgan

25 Bggest Damage s Done n Contractons ultmate borrowers ultmate clam holders Households Nonfnancal frms Bankng (ntermedary) sector Households Penson funds Insurance companes govt Rest of world

26 But Seeds of Crses Are Sown n Expansons ultmate borrowers ultmate clam holders Households Nonfnancal frms Bankng (ntermedary) sector Households Penson funds Insurance companes govt Rest of world

27 How To Moderate Balance Sheet Boom/Bust Cycles?

28 Indvdual Bank Balance Sheet Assets Loans to frms, households Clams on other banks Labltes Labltes to non-banks (e.g. deposts) Labltes to other banks Equty Indvdual bank

29 Balance Sheet for Bankng Sector Assets Total lendng to ultmate borrowers (frms, households govt) Labltes Total debt labltes to non-banks Total equty Bankng sector Slow movng: ncreases n lne wth household wealth

30 Aggregate Balance Sheet Identty n n n 1 y 1 e z 1 1 e Total lendng to ultmate borrowers Total debt labltes To non-banks Total equty of ntermedares

31 Booms Hgher leverage of fnancal ntermedares Larger balance sheets of ntermedares Greater ntertwnng of ntermedares Longer chans Maturty msmatch to sustan longer chans

32 Archtectural Analogy Addng extra capacty (more rooms) to a house when constraned by lmted footprnt The only way s to buld up (lke a Manhattan skyscraper) Except that Manhattan skyscraper s planned ahead, as a coherent whole Better analogy s addng extra floors to a buldng wthout antcpatng future floors on top

33 Sutyagn House n Archangel

34 Busts Deleveragng Shrnkng balance sheets Unravelng of nterbank lendng Runs Retrenchment

35 Northern Rock

36 Jun-07 Dec-06 Jun-06 Dec-05 Composton of Northern Rock's Labltes (June June 2007) Equty Other Labltes Securtzed notes Jun-05 Dec-04 Jun-04 Dec-03 Jun-03 Dec-02 Jun-02 Dec-01 Jun-01 Dec-00 Jun-00 Dec-99 Jun-99 Dec-98 Jun Retal Deposts Bllon pounds

37 Northern Rock's Leverage June December 2007 Leverage on total equty Leverage on shareholder equty Dec-07 Jun-07 Dec-06 Jun-06 Dec-05 Jun-05 Dec-04 Jun-04 Dec-03 Jun-03 Dec-02 Jun-02 Dec-01 Jun-01 Dec-00 Jun-00 Dec-99 Jun-99 Dec-98 Jun Leverage on common equty

38 What Prescrptons for Better Functonng Intermedary Sector?

39 Approach 1: Moderate Fluctuatons n Leverage through Countercyclcal Captal Regulaton n n n e z e y Leverage cap (e.g. Swtzerland) - Countercyclcal captal targets (Geneva Report)

40 Approach 2: Moderate Fluctuatons n Equty through Forward-lookng Provsonng n n n 1 y 1 e z 1 1 e - Spansh Statstcal Provsonng - Pgovan Tax (Geneva Report)

41 Approach 3: Shortenng Intermedaton Chans through Development of New Instruments n n n e z e y Covered bonds - Dansh mortgage bonds - German pfandbref bonds

42 Long Intermedaton Chan households households mortgage MMF shares mortgage pool money market fund MBS ABS ssuer ABS securtes frm Repo Short-term paper commercal bank

43 households mortgage mortgage bank covered bonds households mortgage MMF shares mortgage pool money market fund MBS ABS ssuer ABS securtes frm Repo Short-term paper commercal bank

44 Investors n Covered Bonds Central bank & Treasury Penson fund 8% 9% Insurance 2% Retal/Commerc bank 9% Intermedary Sector 34% Prvate bank 6% Broker/dealer 17% Asset management 47% Hedge fund 2% Source: SIFMA (2009)

45 Hurdles to be Overcome Senorty of depostors (and hence depost nsurance agency) In the Unted States, FDIC polcy s to restrct covered bonds to 4% or less of total labltes An alternatve s to develop specalst narrow covered bond banks who do not take deposts and only ssue covered bonds Model provded by mortgage banks n Denmark

46 Some Features of Possble Future Fnancal System Smaller ntermedary sector Especally securtes sector Shorter ntermedaton chans Less proftable Less maturty transformaton Wth regulatory brakes Monetary polcy? Accountng standards?