Understanding Financial Interconnectedness
Key Messages Utility Bilateral surveillance Multilateral surveillance Macro-prudential policies
Swap Lines England ECB Switzerland United States JAPAN
Swap Lines Iceland Norway Sweden Estonia Latvia Denmark ECB Poland Hungary Switzerland
Swap Lines Norway Denmark England Sweden ECB Belarus Canada Switzerland United States China Korea Japan Mexico India Malaysia Singapore Hong Kong SAR Indonesia Brazil Australia Argentina New Zealand
Key Messages Utility Bilateral surveillance Multilateral surveillance Macro-prudential policies Architecture of global finance Concentrated Interconnected Related fault lines Funding Ratings Payments platforms
Measuring Interconnectedness Interconnectedness Index* Total External Assets+Liabilities 200 400 175 Index 1985=100 150 Percent of GDP 300 200 125 100 1985 1990 1995 2000 2005 2010 100 1985 1990 1995 2000 2005 *: Financial interconnectedness = number of bilateral connections/total number of possible bilateral connections
LCFIs About 20 key LCFIs Top book runners (BoE) Banks & nonbanks (funds) Global ALM Highly correlated markets Infrastructure Custodians Payment and settlement JPMorgan Chase * US Barclays Bank PLC UK Deutsche Bank AG Germany Bank of America US HSBC UK Credit Suisse Group Switzerland Citigroup * US UBS Switzerland BNP Paribas France RBS UK Goldman Sachs US Morgan Stanley US Credit Agricole SA France Lloyds Banking Group UK Rabobank Netherlands Wells Fargo US State Street * US BNY Mellon * US * Some of the largest holders of custody assets.
Data and Risk Maps HSBC HSBC Deutsche... Barclays Citibank Deutsche LCFIexposures... Barclays USB Country A Country B Country C Country D Citibank Country A Country B Country-country exposure Country C Country D
Financial Interconnections Banking System (cross-border bank claims = $30 Trillion) Source: BIS reporting banks
Financial Interconnections Banking System (cross-border bank claims = $30 Trillion) 12% 12% 11% 8% 8% 5% 5% United Kingdom France Germany United States Japan Netherlands Switzerland Source: BIS reporting banks
Financial Interconnections Banking System (cross-border bank claims = $30 Trillion) = Net bilateral exposures Source: BIS reporting banks
Financial Interconnections Shadow Banking System (total claims = $25 Trillion) = Net bilateral exposures IRL Coverage: Money market funds Mutual funds Hedge funds Pension funds Exchange traded funds LU Source: Lipper/Thomson Reuters
Financial Interconnections Banking System (cross-border bank claims = $30 Trillion) Shadow Banking System (total claims = $25 Trillion)
Funds: Offshore Centers Liechtenstein Jersey Cayman Italy Bahamas Luxembourg Guernsey Switzerland Spain Mauritius United Kingdom Ireland Bermuda Germany British Virgin Islands Japan Isle of Man France United States Netherlands
Funds Switzerland: A Simplified View of the Funds Industry Potential to Borrow From Country Share Switzerland 99.9 Liechtenstein 17.3 Singapore 10.9 Peru 1.5 Austria 1.5 Luxembourg 1.0 Institution Funds Managers 89% of Total Credit Suisse 25.6 UBS 19.3 Balfidor Fondsleitung AG 11.8 Swiss & Global 8.9 Pictet 7.0 Swisscanto 6.6 Country Funds Invested in 89% of Total Switzerland 40.7 United States 13.7 France 5.1 Germany 4.9 Unidentified 4.6 United Kingdom 4.3 Institution Funds Custodians 94% of Total Credit Suisse 27.0 UBS 19.4 Zuercher 16.9 RBC Dexia 12.1 Pictet & Cie 6.8 Banque Cant Vaudoise SA 4.3 Country Currency Invested in 97% of Total Swiss Franc 53.1 US Dollar 14.1 Euro 12.6 Japanese Yen 4.9 <No currency> 4.1 UK Pound Sterling 3.8 Share of total is calculated separately for each category. "Potential to Borrow From" is the total value of funds that are registered for sale. For each category, the top six are listed. Sources: Lipper (Thomson Reuters) and staff calculations.
Balance Sheet Transformations Broadly similar global ALM strategies Market-sensitive funding Securitization, ratings Market-sensitive Funding Leverage Leverage AAA - Production Growth Ratings Fault lines Enhancements Securitization
Fault Line: Funding Funding models Banks wholesale, deposit, home Cross-currency risks (BIS shortfall: $1-1¼ trillion) Nonbanks Redemptions --> ST funding Bailouts Inter-LCFI linkages Contagion Round 1 2 3 4 CITIGROUP INC BANK OF AMERICA CORP JPMORGAN CHASE & CO WELLS FARGO & CO CREDIT SUISSE GROUP AG-REG $ DEUTSCHE BANK AG-REGISTERED HSBC HOLDINGS PLC BARCLAYS PLC UNICREDIT SPA INTESA SANPAOLO BANCO SANTANDER SA! SFr
Other Fault Line: Ratings Growth and Decline of AAA Rated Fixed Income Securities 35%! 30%! Total US Issued AAA Rated Fixed Income Securities (rhs)! Share of AAA Rated ABS in Total Fixed Income Issuance! Share of AAA ABS in Total AAA Rated US Issuance! Ratings 3.0! 2.5! 25%! 2.0! 20%! 15%! 1.5! in USD trillions! 10%! 1.0! 5%! 0.5! 0%! 2001! 2002! 2003! 2004! 2005! 2006! 2007! 2008! 2009! 2010! 0.0!
Way Forward Surveillance Data Financial Bilateral surveillance BIS IMF reserves Multilateral surveillance Macro-financial policies G20 Data Gaps Lipper, DTCC, Custodians Supervisors