Evolution, Accounting, Context

Transcription

1 Shadow Banking: Evolution, Accounting, Context by Zoltan Pozsar, Senior Adviser, OFR, U.S. Treasury November 7, 2013 at the IMF/Chicago Fed 16 th Annual International Banking Conference 1

2 Shadow banking and money: The types of assets and the types of backstops behind money claims yield four basic categories of money. Purely public, hybrid and purely private money claims. Cash vs. cash equivalents. Traditional money supply vs. shadow money supply. Assets Public Credits Central Bank T-Notes Sovereign Currency T-Repos T-Repos M0 Reserves (o/n) < (o/n) Taxing T-Repos $1 NAVs T-Bills M0 ability (o/n) < (o/n) Retail Bank [1] Purely public money (M0, or base money): Ability to tax and money creation at will Explicit liquidity puts from the Fed, and T-Notes T-Repos [2] Private-public money (M1 and M2): Money Fund explicit credit puts from the sovereign (i.e. the FDIC) on all bank liabilities. Base T-Bills Public money private M3 [3] Public-private money (M3): Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side. Monetary aggregates measure only the tip of the monetary iceberg (see Pozsar, 2011): M0 does not include T-Bills despite their money-ness. M3 discontinued in Source: Pozsar (2013) Private Credits Reserves Deposits P-Repos P-Repos P-Loans < (o/n) < (o/n) Private M1 public M2 P-Notes P-Repos Wholesale Bank Money Fund T-Repos T-Repos P-Repos M3 (o/n) < (o/n) (o/n) < $1 NAVs (o/n) P-Notes Deposits Deposits Purely M3 private ~ Public Backstops Private Backstops Liabilities M3 [4] Purely private money (M3): No official puts, not even implicitly via the collateral involved. Peripheral money 2

3 Cash pools and shadow money: [1] Cash pools do not have access to M0, M1 or M2. For cash pools, money begins where M2 ends. [2] Cash pools can t get enough T-Bills. This is the paradox of safe investing (see Pozsar, 2011 and 2012). This drives demand for quasi T-bills (creditsafe, short-term assets) issued by shadow banks. [3] Cash pools access is limited to shadow banks, and [4] un-insured bank deposits. Assets Public Credits Private Credits [1] [3] Central Bank T-Notes Reserves P-Loans Currency Reserves [2] Sovereign Money Fund (guaranteed) (secured/guaranteed) Taxing T-Bills T-Repos $1 NAVs S0 S1 T ability (o/n) (o/n) < (o/n) (o/n) (temporary) T-Bills [1] [3] Retail Bank (insured) Deposits [4] Wholesale Bank (un-ins./un-sec./un-div.) M0 S0 Deposits P-Repos P-Repos Cash M1 S1 P < (o/n) (o/n) < (o/n) (o/n) (collateral) M2 T-Notes T-Bills P-Notes (secured) T-Repos T-Repos (o/n) < (o/n) (secured) P-Repos Money Fund (secured/diversified) T-Repos S2 T (permanent) T-Repos T-Repos P-Repos $1 NAVs S1 S S1 P (o/n) < (o/n) (o/n) < (o/n) (o/n) S1 T S2 P (o/n) (real money) (seclenders) (corporate) (levered money) Cash pools are constrained to holding public-private & and private shadow monies. P-Notes Deposits Deposits S2 U (temporary) Public Backstops Liabilities Private Backstops 3 Source: Pozsar (2013)

4 Cash pools and shadow money: Cash pools always face some counterparty risk in a cash portfolio. How effective is retail deposit insurance and LoLR access to retail and wholesale banks only when cash pools prefer to invest their cash balances elsewhere for reasons of safety? Assets Ineffective safety net: a system funded by many uninformed, small and insured depositors is more stable than a system funded by a relatively few very well informed, very large and un-insured institutional cash pools! Public Credits Private Credits [1] [3] Reserves P-Loans [4] Wholesale Bank (un-ins./un-sec./un-div.) T-Repos T-Repos P-Repos $1 NAVs S1 S S1 P (o/n) < (o/n) (o/n) < (o/n) (o/n) Central Bank T-Notes Currency Reserves [2] Sovereign Money Fund (guaranteed) (secured/guaranteed) Taxing T-Bills T-Repos $1 NAVs S0 S1 T ability (o/n) (o/n) < (o/n) (o/n) (temporary) T-Bills [1] [3] Retail Bank (insured) Deposits P-Repos P-Repos Cash M1 S1 P < (o/n) (o/n) < (o/n) (o/n) (collateral) Deposits M0 S0 M2 T-Notes T-Bills P-Notes (secured) T-Repos T-Repos (o/n) < (o/n) (secured) P-Repos Money Fund (secured/diversified) T-Repos S2 T (permanent) (levered money) P-Notes Deposits Deposits S2 U (temporary) S1 T S2 P (o/n) (real money) (seclenders) (corporate) Source: Pozsar (2013) Public Backstops Liabilities Private Backstops 4

5 Dealers buy-side customers: Risk portfolio managers need leverage, shorting and derivative exposures. Cash plays a role in each. Leverage: (cash for funding) Public Credits Central Bank Sovereign T-Notes Currency Reserves < (o/n) Trading Money Fund (corporate) (permanent) Taxing T-Bills ability (o/n) < (o/n) (temporary) T-Repo (real money) Shorting: (cash as collateral) Assets Retail Bank T-Bills Trading $1 NAVs (o/n) (seclenders) Reserves Deposits P-Loans < (o/n) < (o/n) Cash (collateral) Derivatives: (cash for margining) Private Credits Wholesale Bank Deposits Trading P-Repo Money Fund T-Repos T-Repos (o/n) < (o/n) < (o/n) (levered money) I-Loans Deposits Trading $1 NAVs (o/n) (temporary) Source: Pozsar (2013) Public Backstops Liabilities Private Backstops 5

6 The simplified dealer eco-system: [1] Cash and risk PMs, money and risk dealers. [2] and net long/short positions. ( (cash needs/yield) T-Notes T-Repo P-Notes P-Repo < IRS FXS IRS Trading Repo FXS (temporary) (temporary) Risk Dealer < Money Dealer (cash rich/safety) Swaps Payables Source: Mehrling et al (2013) Bagehot Was a Shadow Banker 6

7 Risk intermediation: PM s equity is temporary equity. Temporary equity is an asset allocation decision. Dealers intermediate temporary equity b/w winning and losing counterparts to a bet. ( (cash needs/yield) Money Dealer (cash rich/safety) T-Notes T-Repo P-Notes P-Repo < IRS FXS IRS Trading FXS (temp.) Repo ( (temp.) Risk Dealer < Swaps Payables Securities Out Cash In Securities In Cash Out Source: Mehrling et al (2013) Bagehot Was a Shadow Banker 7

8 Risk intermediation: Dealers equity is permanent equity. For counterparty and inventory risk. ( (cash needs/yield) Money Dealer (cash rich/safety) T-Notes T-Repo P-Notes P-Repo < IRS FXS IRS Trading Repo FXS (temporary) (temporary) (permanent) Risk Dealer < Securities Out Swaps Payables (permanent) Securities In Cash In Cash Out Source: Mehrling et al (2013) Bagehot Was a Shadow Banker 8

9 Symptoms vs. Causes is a solution for symptoms. What dealers do is a reflection of the eco-system they inhabit. Imbalances (future) Imbalances (present) Macro Drivers (cash needs/yield) [4] Unfunded Promises T-Notes T-Repo [5] Negative Carry ( P-Notes P-Repo Peggers Pegs [1] < IRS Capital Labor [2] FXS Pooling "AMX" [3] IRS Trading Repo FXS (temporary) (temporary) (permanent) Risk Dealer < Money Dealer (cash rich/safety) Macro Drivers Swaps Payables Securities Out (permanent) Securities In Source: Pozsar (2013) Cash In Cash Out 9

10 Source: Pozsar (2013) Imbalances (future) Macro Drivers (cash needs/yield) Unfunded Promises T-Notes T-Repo Negative Carry ( P-Notes P-Repo < IRS Trading FXS (temporary) Money Dealer Repo (permanent) (temporary) Peggers Capital Pooling Pegs Labor "AMX" Risk Dealer < (cash rich/safety) IRS FXS Imbalances (present) Macro Drivers Swaps Payables (permanent) CIO Hedge Fund Treasurer "Fund Liabilities" "Beat Benchmark" "Don't Lose" CEO 10 "Grow"

11 Conclusions: A Macro View on Shadow Banking 11

12 1. Bond portfolios are getting more and more leveraged and bonds are becoming more and more valuable as collateral. 2. Leveraged bond portfolios help asset-liability matching in an ever-lower yield environment and collateral gives cash pools safety in a system w/ an outdated safety net. 3. Credit intermediation is just a byproduct. A carry trader goes to work every day not to lend but to generate alpha. 4. Credit, maturity and liquidity transformation is a start, but ask why : to manage future and present imbalances. 5. Credit transformation ~ bond-like volatility and equitylike returns to help CIOs meet future promises. Maturity and liquidity transformation ~ quasi Treasury bills and quasi money claims for the safekeeping of skewed incomes. Source: Pozsar (2013) 12