Portfolio Planning Models for Corporate Strategic Planning

Portfolio Planning Models for Corporate Strategic Planning

Key Terms and Ideas

  • Business And Its Policy
  • Concept of Strategy
  • Strategic Management
  • Vision, Mission, Objectives And Goals
  • Environment Analysis And Diagnosis
  • Strategic Advantage Analysis
  • Corporate Strategy
  • Michael Porter’s Generic Strategies
  • Formulation Of Functional Strategy
  • Types Of Strategies
  • Diversification Strategies For Companies
  • Turnaround, Retrenchment Divestment, And Liquidation Strategies For Companies
  • TOWS Matrix Analysis
  • BCG Matrix
  • Ansoff’s Matrix
  • ADL Matrix
  • The General Electric Model
  • Porter’s Five Forces Model
  • Mckinsey’s 7’s Framework
  • Value Chain Concept Analysis
  • Business And Investment Level Strategy
  • Vertical Integration And Strategic Alliances
  • Acquisitions And Joint Ventures
  • Tailoring Strategy Analysis
  • Industrial Environment Analysis
  • Strategic Change Management
  • Strategies For Competing In Globlizing Markets
  • Corporate Culture and Leadership
  • Strategic Control System
  • Matching Structure And Control Analysis
  • Strategy implementation And Control
  • Business Process Reengineering And Benchmarking
  • TQM, Six Sigma
  • Management And Contemporary Strategic Issues

Analytical Methods for Startegic Planning and Analysis

Image Source: The Strategic Development Process

Strategic Choices and Decisions

  • Product Portfolio (SBU Level) – What products should we sell/make?
  • Business Portfolio (Corporate Level)- What Businesses should we be in?

Analytical methods for Corporate Portfolio Planning

  • GE/Mckinsey Nine Cell Matrix
  • BCG Growth Share Matrix
  • Shell/Directional Policy Matrix DPM
  • ADL Strategic Conditions Matrix
  • Ansoff Matrix
  • Hofer/Schendel Matrix
  • and many other variants

BCG Growth Share Matrix

Image Source: BCG Matrix: Portfolio Analysis in Corporate Strategy

Image Source: THE PRODUCT PORTFOLIO

Image Source: Group Map

GE/McKinsey Nine Cell Matrix

Image Source: GE MCKINSEY MATRIX

Image Source: PRODUCT STRATEGY TOOLS – GE/MCKINSEY PORTFOLIO MATRIX

Shell/Directional Policy Matrix

Image Source: PRODUCT AND PORTFOLIO ANALYSIS

ADL Matrix

Image Source: ADL Matrix (Portfolio Management)

Ansoff Matrix

Image Source: ANSOFF MATRIX

Hofer/Schendel Matrix

Image Source: PRODUCT AND PORTFOLIO ANALYSIS

My Related Posts

Strategy | Strategic Management | Strategic Planning | Strategic Thinking

The Origins and History of Management Consulting

Hierarchical Planning: Integration of Strategy, Planning, Scheduling, and Execution

Profiles in Operations Research

History of Operations Research

Shell Oil’s Scenarios: Strategic Foresight and Scenario Planning for the Future

Art of Long View: Future, Uncertainty and Scenario Planning

George Dantzig and History of Linear Programming

Key Sources of Research

Strategic planning : models and analytical techniques :

Dyson, Robert G.

Chichester, West Sussex, England ; New York : Wiley, c1990.

Strategic Portfolio Planning Systems.

In: Multinational Strategic Planning. Palgrave Macmillan, London.

Channon D.F., Jalland M. (1978)

The Strategic Development Process

Robert G. Dyson, Jim Bryant, John Morecroft and Frances O’Brien

https://www.academia.edu/26231766/The_Strategic_Development_Process

Why you’ve got to put your portfolio on the move

July 22, 2020 |

McKinsey

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-youve-got-to-put-your-portfolio-on-the-move


The Corporate Portfolio

JANUARY 01, 1977 By Bruce Henderson


The Product Portfolio

JANUARY 01, 1970 By Bruce Henderson

https://www.bcg.com/publications/1970/strategy-the-product-portfolio


BCG Classics Revisited: The Growth Share Matrix

JUNE 04, 2014 

By Martin Reeves, Sandy Moose, and Thijs Venema

What Is the Growth Share Matrix?

BCG

https://www.bcg.com/en-us/about/our-history/growth-share-matrix

Enduring Ideas: The GE–McKinsey nine-box matrix

September 1, 2008 | Article

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/enduring-ideas-the-ge-and-mckinsey-nine-box-matrix

Enduring Ideas: Classic McKinsey frameworks that continue to inform management thinking

July 1, 2008 | Article

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/enduring-ideas-classic-mckinsey-frameworks-that-continue-to-inform-management-thinking

Corporate Portfolio Management:

Appraising Four Decades of Academic Research

by Michael Nippa, Ulrich Pidun, and Harald Rubner

Academy of Management Perspectives

Not dead yet: the rise, fall and persistence of the BCG Matrix

Problems and Perspectives in Management, Vol. 15, Iss. 1, pp. 19-34,

Dag Øivind Madsen

Date Written: March 27, 2017

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2954610

Product and portfolio analysis

An Empirical Comparison of Standardized Portfolio Models

Jerry Wind

Vijay Mahajan

https://www.researchgate.net/publication/260183736_An_Empirical_Comparison_of_Standardized_Portfolio_Models

Designing Product and Business Portfolio

Jerry Wind

Vijay Mahajan

https://www.researchgate.net/publication/260183490_Designing_Product_and_Business_Portfolio

https://hbr.org/1981/01/designing-product-and-business-portfolios

Effects of portfolio planning methods on decision making: experimental results

J. Scott Armstrong
University of Pennsylvania, armstrong@wharton.upenn.edu

Roderick J. Brodie
University of Auckland, r.brodie@auckland.ac.nz

Manage Beyond Portfolio Analysis

HBR 1984

https://hbr.org/1984/01/manage-beyond-portfolio-analysis

Comparison and Usage of the Boston Consulting- portfolio and the McKinsey-portfolio

Portfolio Analysis Models: A Review

Udo-Imeh, Philip T Edet, William E. Anani, Rajunor B.

Strategic Product Portfolio Management:

A Focus on the Bio-Pharmaceutical Sector and Roche

Strategic Analysis through the General Electric/McKinsey Matrix: An Application to the Italian Fashion Industry

BCG Matrix

GroupMap

https://www.groupmap.com/map-templates/bcg-matrix/

The directional policy matrix—tool for strategic planning

S.J.Q.RobinsonaR.E.HichensbD.P.Wade

Long Range Planning

1978

Corporate Strategy: Portfolio Models

Eli Segev

International Thomson Pub., 1995 – Business & Economics – 188 pages

Ansoff Matrix

Product Strategy Tools – GE/McKinsey Portfolio Matrix

http://pmoxon.blogspot.com/2011/09/product-strategy-tools-gemckinsey.html

Methods of strategic analysis and proposal method of measuring productivity of a company

Wasilij Rudnicki

SOME METHODOLOGICAL COMMENTS ON THE DIRECTIONAL POLICY MATRIX

PROFESSOR MALCOLM MCDONALD

Cranfield School of Management

Application of ADL Matrix in Developed Industrial Companies

  • October 2009

Samir Ži

Tonči Mikac

https://www.researchgate.net/publication/258518402_Application_of_ADL_Matrix_in_Developed_Industrial_Companies

THE LIFE-CYCLE APPROACH TO STRATEGIC PLANNING

Arnoldo C. Hax and Nicolas S. Majluf

WP #1493-83 October 1983

BCG Matrix: Portfolio Analysis in Corporate Strategy

ADL Matrix (Portfolio Management)

https://www.comindwork.com/weekly/2019-02-04/productivity/adl-matrix-portfolio-management

AN EMPIRICAL ANALYSIS OF THE BOSTON CONSULTING GROUP’S PORTFOLIO MODEL

Malcolm B. Coate

WORKING PAPER NO. 71

August 1982

PORTFOLIO ANALYSIS – A USEFUL MANAGEMENT TOOL

Samir Žic, Hari Hadžić, Milan Ikonić

The directional policy matrix — a new aid to corporate planning

Available online 19 June 2002.

Prepared by a Member of the Editorial Board from Material published by Shell International Petroleum Company Limited

https://www.sciencedirect.com/science/article/abs/pii/0377841X77900432

Strategic Management and Business Policy: For Managers and Consultant

by B Hiriyappa

GE McKinsey Matrix

Expert Program Management

Global Trends, Scenarios, and Futures: For Foresight and Strategic Management

Global Trends, Scenarios, and Futures: For Foresight and Strategic Management

There are a few Institutions which do general long term trends and scenario analysis.

  • US DNI NIC
  • Atlantic Council
  • UK MOD
  • Shell International
  • HP
  • EY
  • WEF

There are many institutions both public and private which do issue or industry specific scenarios, trends, and futures analysis.

  • Water
  • Food
  • Energy
  • Climate Change
  • Globalization
  • Urbanization
  • Governance
  • Security
  • Technology
  • Demographic
  • Industry specific
  • Nationalism
  • Protectionism
  • Healthcare
  • Human Development

Why do Scenarios?

Its a way to internalize an organization’s external environment. By doing so, managers and leaders can future-proof their strategy.

Image Source: If only we knew. With scenario planning, we do. Here’s how to prepare better for the next crisis

Image Source: Global Business Network

Image Source: WHY THE SOCIAL SECTOR NEEDS SCENARIO PLANNING NOW

Image Source: Megatrends 2020 and beyond /EY Mega Trends

The article below was published in MIT Sloan Review.

The World in 2030: Nine Megatrends to Watch

Where will we be in 2030? 

I don’t usually play the futurist game — I’m more of a “presentist,” looking at the data we have right now on fast-moving megatrends that shape the world today. But a client asked me to paint a picture of what the big trends tell us about 2030. And I’d say we do have some strong indications of where we could be in 11 years. 

The directions we go and choices we make will have enormous impacts on our lives, careers, businesses, and the world. Here are my predictions of how nine important trends will evolve by 2030 — listed in order roughly from nearly certain to very likely to hard to say

Nine Global Trends on the Horizon

Demographics: There will be about 1 billion more of us, and we will live longer. The world should reach 8.5 billion people by 2030, up from 7.3 billion in 2015. The fastest growing demographic will be the elderly, with the population of people over 65 years old at 1 billion by 2030. Most of those new billion will be in the middle class economically, as the percentage of citizens in dire poverty continues to drop (a rare sustainability win). Even as the middle swells, however, the percentage of all new wealth accruing to the very top of the pyramid will continue to be a major, and destabilizing, issue. That said, the other megatrends, especially climate change, could slow or change the outcomes here.

Urbanization: Two-thirds of us will live in cities. The urbanization of our populations will increase, creating more megacities as well as small- and medium-size metropolises. Countervailing forces will include a rising cost of living in the most desirable cities. The effects will include the need for more big buildings with better management technologies (big data and AI that makes buildings much more efficient), and we will need more food moved in from where we grow it to where we eat it — or rapidly expand urban agriculture.

Transparency: Our world will become even more open — and less private.It’s hard to imagine that the trend to track everything will be going anywhere but in one direction: a radically more open world. The amount of information collected on every person, product, and organization will grow exponentially, and the pressure to share that information — with customers and consumers in particular — will expand. The tools to analyze information will be well-developed and will make some decision-making easier; for instance, it will be easier to choose products with the lowest carbon footprints, highest wages for employees, and fewest toxic ingredients. But all these tools will shatter privacy in the process.

Privacy Policy

Climate Crisis: The climate will continue to change quickly and feature regular, extreme weather everywhere. Yes, there’s still uncertainty about how everything will play out exactly, but not about whether the climate is changing dramatically and dangerously. Significant inertia in both atmospheric and economic/human systems allows for a more confident prediction of what will happen in just 11 years. The Intergovernmental Panel on Climate Change (IPCC) has made clear how critical it is to radically alter the path of carbon emissions to hold the world to 1.5 degrees Celsius of warming. But that’s not likely to happen with current levels of commitment in global governments: The important Paris climate accord of 2015, in theory, agrees to hold warming to 2 degrees Celsius. But in practice, what countries have committed to so far will only hold us to no more than 3 degrees of warming. By 2030, we are very likely to already be at or approaching the 1.5 mark. 

The results of climate change will be unrelenting. Many highly populated coastal areas will be in consistent trouble, as sea levels rise. The natural world will be much less rich, with drastic to catastrophic declines in populations of many species and major to total losses of ecosystems like coral. Droughts and floods will stress global breadbasket regions and shift where we grow major crops. The Arctic will be ice-free in the summer (this will allow ships to move freely in this region, which is technically good for shorter supply chains but a Pyrrhic victory at best). Between seas, heat, and shifts in water availability, mass migrations will likely have begun. By 2030, we will have much better clarity on how bad the coming decades after that point will be. We will know whether the melting of the major ice sheets will be literally inundating most coastal cities, and if we’re truly approaching an “Uninhabitable Earth” in our lifetimes. 

Resource Pressures: We will be forced to more aggressively confront resource constraints. To keep volumes of major commodities (such as metals) in line with economic growth, we will need to more quickly embrace circular models: sourcing much less from virgin materials, using recycled content and remanufactured products, and generally rethinking the material economy. Water will be a stressed resource, and it seems likely that many cities will be constantly in a state of water shortage. We will need more investment in water tech and desalination to help. 

Clean Tech: The transformation of our grid, our roadways, and our buildings to zero-carbon technology will be surprisingly far along. Here’s some good news: Due to continuing drops in the cost of clean technologies, renewable energy is dramatically on the rise, making up more than half the global new power capacity every year since 2015. By 2030, effectively no new additions of generating capacity will come from fossil-fuel-based technologies.Electric vehicles will be a large part of the transportation equation: While estimates about the share of EVs on the road by 2030 range from the teens to nearly 100% (assuming early retirement of internal combustion engines), nearly all sales of new vehicles will be EVs. This will be driven by dramatic reductions in the cost of batteries and strict legislation banning fossil-fuel engines. We will also see an explosion of data-driven technologies that make buildings, the grid, roadways, and water systems substantially more efficient.

Technology Shifts: The internet of things will have won the day, and every new device will be connected. Proponents of the “singularity” have long projected that by around 2030, affordable AI will achieve human levels of intelligence. AI and machine learning will plan much of our lives and make us more efficient, well beyond choosing driving routes to optimize traffic. Technology will manipulate us even more than it does today — Russian interference in U.S. elections may look quaint. AI will create some new kinds of jobs but will also nearly eliminate entire segments of work, from truck and taxi drivers to some high-skill jobs such as paralegals and engineers.

Global Policy: There’s an open question about how we’ll get important things done. I’m thinking specifically about whether global governments and institutions will be working in sync to aggressively fight climate change and resource pressures, and tackle vast inequality and poverty — or whether it will be every region and ethnic group for itself. Predicting politics is nearly impossible, and it’s hard to imagine how global policy action on climate and other megatrends will play out. The Paris Agreement was a monumental start, but countries, most notably the U.S., have lately retreated from global cooperation in general. Trade wars and tariffs are all the rage in 2019. It seems likely that, even more than today, it will be up to business to play a major role in driving sustainability.

Populism: The rise of nationalism and radicalism may increase … or it won’t. Even less certain than policy is the support, or lack thereof, of the mass of people for different philosophies of governing. In recent years, populists have been elected or consolidated power in countries as varied as the U.S., Brazil, and Hungary. And yet, in recent weeks, citizens in countries like Turkey, Algeria, and Sudan have pushed back on autocracy. Will that trend continue?

How Should Business Prepare?

Laying out strategies for companies to navigate this likely future world is a book-length conversation. But let me suggest a few themes of action to consider:

  • Engage everyone in the sphere of the business world on climate. A dangerously changing climate is the biggest threat humanity has ever faced. But it’s not all set in stone … yet. Companies have an economic incentive and moral responsibility to work hard to reduce the damage as much as possible. Engage employees (stamp out climate denial), talk to consumers and customers about climate issues through your products, and change internal rules on corporate finance to make investment decisions with flexible hurdle rates that favor pro-climate spending. Most importantly, use influence and lobbying power to demand, at all levels of government, an escalating public price on carbon — and publicly admonish industry lobbying groups that don’t.
  • Consider the human aspect of business more. As new technologies sweep through society and business, the change will be jarring. Those changes and pressures are part of why people are turning to populist leaders who promise solutions. Business leaders should think through what these big shifts mean for the people that make up our companies, value chains, and communities.
  • Embrace transparency. To be blunt, you don’t have a choice. Each successive generation will expect more openness from the companies they buy from and work for. 
  • Listen to the next generation. By 2030, the leading edge of millennials will be nearing 50, and they and Gen Z will make up the vast majority of the workforce. Listen to them now about their priorities and values. 

Predicting the future means projecting forward from what’s already happening, while throwing in expected inertia in human and natural systems. It can give us an impressionistic picture of the world of the future. Our choices matter a great deal, as individuals and through our organizations and institutions. Business, in particular, will play a large role in where the world goes. Employees, customers, and even investors increasingly demand that the role of business be a positive one. 

Look, we could all just wait and see where these historic waves take us. But I prefer that we all work proactively to ensure that a better, thriving future is the one we choose.

About the Author

Andrew Winston is founder of Winston Eco-Strategies and an adviser to multinationals on how they can navigate humanity’s biggest challenges and profit from solving them. He is the coauthor of the international best seller Green to Gold and the author of the popular book The Big Pivot: Radically Practical Strategies for a Hotter, Scarcer, and More Open World. He tweets @andrewwinston.

a database of reports globally published by many institutions.

Global Trends and Future Scenarios

IDB InterAmerican Development Bank

Key Institutions doing Global Scenarios, Trends, and Futures analysis

Shell Scenarios

https://www.shell.com/energy-and-innovation/the-energy-future/scenarios.html

HP Mega Trends

https://hpmegatrends.com

World Economic Forum

Global Risks Report

https://www.weforum.org/reports/the-global-risks-report-2020

US DNI NIC Global Trends

Paradox of Progress

https://www.dni.gov/index.php/global-trends-home

https://www.dni.gov/index.php/digital-extras/previous-reports

Atlantic Council

Global Risks 2035 Update

Decline or New Renaissance?

Mathew J. Burrows 2019

UK MOD Global Strategic Trends
EY Mega Trends

Megatrends 2020 and beyond

https://www.ey.com/en_gl/megatrends

OECD

The Long View: Scenarios for the world economy to 2060

http://www.oecd.org/economy/growth/scenarios-for-the-world-economy-to-2060.htm

EU Parliament
World Bank

The Future is Now: Scenarios to 2025 and Beyond

J. Warren Evans

https://elibrary.worldbank.org/doi/full/10.1596/978-1-4648-0307-9_ch4

International Monetary Fund

World Economic Outlook

https://www.imf.org/en/Publications/WEO

World Resources Institute

https://www.wri.org/publication/which-world-scenarios-21st-century

United Nations

McKinsey Global Institute

MGI in 2019

Highlights of our research this year

https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Innovation/Ten%20highlights%20from%20our%202019%20research/MGI-in-2019-A-compendium-of-our-research-this-year-vF.ashx

McKinsey and Company

The Use and Abuse of Scenarios

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-use-and-abuse-of-scenarios

McKinsey Special Collections
Trends and global forces

https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Strategy%20and%20corporate%20finance%20special%20collection/Final%20PDFs/McKinsey-Special-Collections_Trends-and-global-forces.ashx

Shifting tides: Global economic scenarios for 2015–25

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/shifting-tides-global-economic-scenarios-for-2015-25

Boston Consulting Group BCG

Have you future Proofed your strategy?

APRIL 17, 2020 By Alan InyHans KuipersEnrique Rueda-Sabater, and Christian Haakonsen

https://www.bcg.com/publications/2020/four-scenarios-assess-business-resilience

International Food Policy Research Institute IFPRI

Global food projections to 2020 

emerging trends and alternative futures

https://www.ifpri.org/publication/global-food-projections-2020

World Energy Council

WORLD ENERGY SCENARIOS: COMPOSING ENERGY FUTURES TO 2050

https://www.worldenergy.org/publications/entry/world-energy-scenarios-composing-energy-futures-to-2050

EPRI Electric Power Research Institute

A Perspective on the Future of Energy: Scenarios, Trends, and Global Points of View

Millienium Project

THE MILLENNIUM PROJECT

The Institute for the Future

My Related Posts

Shell Oil’s Scenarios: Strategic Foresight and Scenario Planning for the Future

Strategy | Strategic Management | Strategic Planning | Strategic Thinking

Art of Long View: Future, Uncertainty and Scenario Planning

On Anticipation: Going Beyond Forecasts and Scenarios

HP’s Megatrends

Clock of the Long Now: Time and Responsibility

History of Operations Research

Profiles in Operations Research

Jay W. Forrester and System Dynamics

Water | Food | Energy | Nexus: Mega Trends and Scenarios for the Future

Short term Thinking in Investment Decisions of Businesses and Financial Markets

The Origins and History of Management Consulting

Multilevel Approach to Research in Organizations

Hierarchical Planning: Integration of Strategy, Planning, Scheduling, and Execution

Networks and Hierarchies

Hierarchy Theory in Biology, Ecology and Evolution

Systems Biology: Biological Networks, Network Motifs, Switches and Oscillators

Growth and Form in Nature: Power Laws and Fractals

Shapes and Patterns in Nature

Systems View of Life: A Synthesis by Fritjof Capra

Multiplex Financial Networks

Boundaries and Networks

Key Sources of Research

Future Population Growth

by Max Roser

Our World in Data

This article was first published in 2014. It was last revised in November 2019.

https://ourworldindata.org/future-population-growth

Future Studies

Wikipedia

https://en.wikipedia.org/wiki/Futures_studies

Global Foresight 2050 – Six global scenarios and implications for the forest sector 

AUTHORS: Sten Nilsson, Fredrik Ingemarson
PUBLISHED: 2017, Uppsala
PUBLISHER: Swedish University of Agricultural Sciences (SLU)

An overview of global energy scenarios by 2040: identifying the driving forces using cross‑impact analysis method

S. Ghasemian1 · A. Faridzad1 · P. Abbaszadeh2 · A. Taklif1 · A. Ghasemi1 · R. Hafezi3

Received: 27 November 2019 / Revised: 11 March 2020 / Accepted: 6 April 2020

https://link.springer.com/article/10.1007/s13762-020-02738-5

Learning from the Future

How to make robust strategy in times of deep uncertainty 

From the Magazine (July–August 2020)

https://hbr.org/2020/07/learning-from-the-future

Why the Social Sector Needs Scenario Planning Now

BCG

OCTOBER 01, 2020 

https://www.bcg.com/en-us/publications/2020/why-social-sector-needs-scenario-planning

Future Worlds

PA Consulting

https://www.paconsulting.com/insights/2020/futureworlds/

Directions in Scenario Planning Literature – A Review of the Past Decades

Celeste Amorim Varuma, Carla Meloa
aDepartment of Economics, Management and Industrial Engineering, University of Aveiro,

Campus Universitário de Santiago, 3810-193 Aveiro, Portugal

The Century Ahead:
Four Global Scenarios

Christi Electris, Paul Raskin, Rich Rosen, and John Stutz

Tellus

https://greattransition.org

Four Scenarios for Geopolitical Order in 2025-2030: What Will Great Power Competition Look Like?

September 16, 2020

CSIS

https://www.csis.org/analysis/four-scenarios-geopolitical-order-2025-2030-what-will-great-power-competition-look

Futurology Why it’s worth reading crazy-sounding scenarios about the future

Speculating about the future can make it easier to respond to unexpected events

Jul 6th 2019

Economist

https://www.economist.com/leaders/2019/07/06/why-its-worth-reading-crazy-sounding-scenarios-about-the-future

THE FUTURE OF MOBILITY

Scenarios for the United States in 2030

Johanna Zmud, Liisa Ecola, Peter Phleps, Irene Feige

Rand

Future energy: In search of a scenario reflecting current and future pressures and trends

Jennifer Morris, David Hone, Martin Haigh, Andrei Sokolov and Sergey Paltsev

November 2020

MIT Joint Program on the Science and Policy of Global Change

2018 Food, Water, Energy and Climate Outlook 

MIT Joint Program on the Science and Policy of Global Change

Consensus Forecasts

Global Outlook 2020 – 2030

The Conference Board

Global Economic Outlook

https://www.conference-board.org/topics/global-economic-outlook

The Water-Energy-Food Nexus

A new approach in support of food security and sustainable agriculture

FAO

The Food Water Energy Nexus

UNECE

https://www.unece.org/env/water/nexus

Water, Food and Energy Nexus in Asia and the Pacific

UNESCAP

Developing the Pardee RAND Food-Energy-Water Security Index

Toward a Global Standardized, Quantitative, and Transparent Resource Assessment

by Henry H. WillisDavid G. GrovesJeanne S. RingelZhimin MaoShira EfronMichele Abbott

RAND

https://www.rand.org/pubs/tools/TL165.html

Introduction to the water-energy nexus

Article — 23 March 2020

IEA

https://www.iea.org/articles/introduction-to-water-and-energy

Mining & Metals Scenarios to 2030

McKinsey

WEF

https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Metals%20and%20Mining/PDFs/mining_metals_scenarios.aspx

The Long View: Scenarios for the world economy to 2060

OECD

http://www.oecd.org/economy/growth/scenarios-for-the-world-economy-to-2060.htm

Risk, Resilience, and Alternative Futures: Scenario-building at the World Economic Forum

Christina Garsten, Adrienne Sörbom

CBS

https://research.cbs.dk/en/publications/risk-resilience-and-alternative-futures-scenario-building-at-the-

If only we knew. With scenario planning, we do. Here’s how to prepare better for the next crisis

WEF

https://www.weforum.org/agenda/2020/11/scenario-planning-is-the-what-if-in-business-here-s-how-it-works/

Energy and Climate Scenarios

IHS Markit

https://ihsmarkit.com/products/energy-climate-scenarios.html

The World in 2030: Nine Megatrends to Watch

Andrew S. Winston 

May 07, 2019

MIT Sloan Review

https://sloanreview.mit.edu/article/the-world-in-2030-nine-megatrends-to-watch/

The future of capitalism: Trends, scenarios and prospects for the future

Gerard Delanty

First Published January 30, 2019 

Journal of Classical Sociology

https://journals.sagepub.com/doi/10.1177/1468795X18810569

EYQ Mega Trends

Year 2020 Mega Trends

https://www.ey.com/en_gl/megatrends

Year 2016 Megatrends

Year 2018 Megatrends

Shaping the Future of Global Food Systems: A Scenarios Analysis

Highlights from the report February 2017

Deloitte and WEF

Global Risks 2035: The Search for a New Normal

Atlantic Council

2016

Vision 2040: Global Scenarios for the Oil and Gas Industry

Deloitte

The future of Asia

Asian flows and networks are defining the next phase of globalization

MGI 2020

Global US Dollar Funding Markets

Global US Dollar Funding MarkeTS

When US interest rates decline ( accomadating monetary policy), funding flows increase in to USA. (Money markets). Driven by increase in loans in USA.

When US interest rates increase (tightening of Monetary policy), capital Investment flows increase into USA. (Capital Markets). Driven by search for yields.

Key Terms

  • Eurodollars
  • International Money Markets
  • Funding Markets
  • Shadow Banking
  • Money Flows
  • Capital Flows
  • Round Tripping
  • International Financial System
  • FX Market
  • FX Swaps
  • FX Reserves
  • Payment Flows
  • Funding Flows
  • Eurocurrency
  • EuroEuro
  • EuroYen
  • EuroRMB
  • FX Forwards
  • Currency Swaps

International Markets for US Dollar

US dollar is currently predominant currency in global financial markets.

Its use is wide spread and deep.

  • Cross Border Loans
  • International Debt Securities
  • FX Transactions
  • Official Public FX Reserves
  • Trade Invoicing
  • SWIFT Payments

How are dollars funded by institutions involved in international credit markets?

  • Euro Dollars
  • FX Swaps and Forwards
  • Currency Swaps

Please see this new publication from BIS for details.

US DOLLAR FUNDING: AN INTERNATIONAL PERSPECTIVE

The US dollar plays a central role in the international monetary and financial system. It is the foremost funding currency, with about half of all cross-border loans and international debt securities denominated in US dollars. Around 85% of all foreign exchange transactions occur against the US dollar. It is the world’s primary reserve currency, accounting for 61% of official foreign exchange reserves. Around half of international trade is invoiced in US dollars, and around 40% of international payments are made in US dollars (Graph 1).

Image Source: US DOLLAR FUNDING: AN INTERNATIONAL PERSPECTIVE

Currencies in Global Payments

Image Source: RMB Tracker

Currencies in Trade Finance Market

Image Source: RMB Tracker

Currencies in FX Spot market

Image Source: RMB Tracker

Characteristics of Global US Dollar Funding Markets

Image Source: US DOLLAR FUNDING: AN INTERNATIONAL PERSPECTIVE

Image Source: US DOLLAR FUNDING: AN INTERNATIONAL PERSPECTIVE

Image Source: THE GLOBAL ROLE OF THE US DOLLAR AND ITS CONSEQUENCES

Image Source: THE GLOBAL ROLE OF THE US DOLLAR AND ITS CONSEQUENCES

Image Source: THE GLOBAL ROLE OF THE US DOLLAR AND ITS CONSEQUENCES

Image Source: THE GLOBAL ROLE OF THE US DOLLAR AND ITS CONSEQUENCES

Image Source: FX swaps and forwards: missing global debt?

Image Source: FX swaps and forwards: missing global debt?

Assets and Liabilities of Banks and Shadow Banks in Onshore and Offshore markets

Assets and Liabilities in Balance sheets in Onshore markets

Image Source: Offshore Dollar Creation and the Emergence of the post-2008 International Monetary System

Liabilities in Balance sheets of Financial Intermediatory in Onshore and Offshore markets

Image Source: The Future of Offshore Dollar Creation: Four Scenarios for the International Monetary System by 2040

Transactions Chains in cross border funding markets

Image Source: US DOLLAR FUNDING: AN INTERNATIONAL PERSPECTIVE

Money Inflows and RounD tripping

Several papers and articles in the references below discuss issues of US dollar inflows on US money and credit markets and monetary policy.

Round tripping involves foreign banks borrowing money from US funding markets and lending it to borrowers in the capital/credit markets.

US monetary policy also impacts capital outflows and inflows.

My Related posts

Global Liquidity and Cross Border Capital Flows

Global Flow of Funds: Statistical Data Matrix across National Boundaries

Low Interest Rates and International Capital Flows

Currency Credit Networks of International Banks

Global Financial Safety Net: Regional Reserve Pools and Currency Swap Networks of Central Banks

Balance Sheet Economics – Financial Input-Output Analysis (using Asset Liability Matrices) – Update March 2018

TARGET2 Imbalances in European Monetary Union (EMU)

Contagion in Financial (Balance sheets) Networks

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Foundations of Balance Sheet Economics

The Future of FX Markets – Update October 2019

Understanding Global OTC Foreign Exchange (FX) Market

Economics of Trade Finance

The Dollar Shortage, Again! in International Wholesale Money Markets

Repo Chains and Financial Instability

Shadow Banking

Key Sources of Research

US dollar funding: an international perspective

Report prepared by a Working Group chaired by
Sally Davies (Board of Governors of the Federal Reserve System) and Christopher Kent (Reserve Bank of Australia)

BIS June 2020

The Eurodollar Market in the United States

MAY 27, 2015

NYFED

https://libertystreeteconomics.newyorkfed.org/2015/05/the-eurodollar-market-in-the-united-states.html

The global role of the US dollar and its consequences

Bank of England Quarterly Bulletin

2017 Q4

“Down The Rabbit Hole” — The Eurodollar Market Is The Matrix Behind It All

the1millionproject

Apr 19

by Tyler Durden

https://t1mproject.medium.com/down-the-rabbit-hole-the-eurodollar-market-is-the-matrix-behind-it-all-a7a054dd4b0f

The Fed’s Quandary With Uncle ED (Eurodollar)

Feb. 28, 2015 4:45 AM ET

https://seekingalpha.com/article/2961016-the-feds-quandary-with-uncle-ed-eurodollar

US Monetary Aggregates, Income Velocity and the Euro-dollar Market

BIS 1980Warren D. McClam

Chapter 5 EURODOLLARS 

Marvin Goodfriend

Federal Reserve Bank of Richmond Richmond, Virginia
1998

The evolution of the Offshore US-Dollar System: past, present and four possible futures

Steffen Murau, Joe Rini and Armin Haas

Global Development Policy Center, Boston University, Boston; City Political Economy Research Centre (CITYPERC), City, University of London, London; Institute for Advanced Sustainability Studies (IASS), Potsdam and Institute for Advanced Sustainability Studies (IASS), Potsdam
*Corresponding author. Email: armin.haas@iass.de

(Received 30 September 2019; revised 17 March 2020; accepted 24 March 2020; first published online 6 May 2020)

https://www.cambridge.org/core/journals/journal-of-institutional-economics/article/evolution-of-the-offshore-usdollar-system-past-present-and-four-possible-futures/B36ED9082CECE54F3F5B8E8F40D15148/core-reader

Hyper-Stablecoinization: From Eurodollars to Crypto-Dollars

Pascal Hügli

July 12, 2020·

https://finance.yahoo.com/news/hyper-stablecoinization-eurodollars-crypto-dollars-120000891.html

IMPACT OF EURO-MARKETS ON THE UNITED STATES BALANCE OF PAYMENTS

*FRED H. KLOpSTOCKf

Financial globalization as positive integration: monetary technocrats and the Eurodollar market in the 1970s

https://www.researchgate.net/publication/340100333_Financial_globalization_as_positive_integration_monetary_technocrats_and_the_Eurodollar_market_in_the_1970s

https://www.tandfonline.com/doi/full/10.1080/09692290.2020.1740291

The Euromarket and the making of the transnational network of finance 1959 – 1979 (Doctoral thesis).

Kim, S. W. (2018). 

University of Cambridge

 https://doi.org/10.17863/CAM.23876

https://www.repository.cam.ac.uk/handle/1810/276574

Dollar Shortage and Eurodollars

By Prashant K. Trivedi and Krushi Parekh | Apr 14 2020 | What We Are Writing, Global Macro

https://multi-act.com/dollar-shortage-and-eurodollars/

Evolution of US-Dollar-Centric International Money Markets and Pro-Cyclicality of Basel III Liquidity Framework

Oleksandr Valchyshen 2019

Bard College

Eurodollars and the US Money Supply

page1image2272994224

The dollar and international capital flows in the COVID-19 crisis 

Giancarlo Corsetti, Emile Marin  

03 April 2020

https://voxeu.org/article/covid-19-crisis-dollar-and-capital-flows

Crypto Dollars and the Evolution of Eurodollar Banking

MAX BRONSTEIN

7 APR 2020 

https://unexpected-values.com/crypto-dollars/

The $40 Trillion Problem

Apr. 6, 2020

Lyn Alden Schwartzer

https://seekingalpha.com/article/4336136-40-trillion-problem

Euro-Dollars and United States Monetary Policy. 

Cort Burk Schlichting 1973

Louisiana State University and Agricultural & Mechanical College

Eurodollar Banking and Currency Internationalization

  • January 2013
  • In book: Investing in Asian Offshore Currency Markets (pp.199-214)

Authors:

Dong He

Robert Neil Mccauley

BIS

https://www.researchgate.net/publication/304796024_Eurodollar_Banking_and_Currency_Internationalization

The Eurodollar Market, Short-term Capital Flows and Currency Crises

Book 1979

Author: Leonard Gomes

Publisher: Macmillan Education UK

https://www.springerprofessional.de/en/the-eurodollar-market-short-term-capital-flows-and-currency-cris/10146406

The Eurodollar Market and the International Transmission of Interest Rates

Jay H. Levin

The Canadian Journal of Economics / Revue canadienne d’Economique 

Vol. 7, No. 2 (May, 1974), pp. 205-224 (20 pages) Published By: Wiley 

The Eurodollar Deposit Market: Stategies for Regulation

George H. Windecker Jr.

1993

American University International Law Review 9, no. 1 (1993): 357-384.

The circular flow of dollars in the world financial markets

Kashi NathTiwari

Available online 23 March 2002.

https://www.sciencedirect.com/science/article/abs/pii/104402839090012C

The Euro-dollar market as a source of United States bank liquidity

Steve B. Steib

Iowa State University

1972

RMB Tracker

SWIFT

https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker/rmb-tracker-document-centre

The Eurodollar Conundrum

FRBNY 1982

The federal funds market and the overnight Eurodollar market

Yungsook Lee

1999

Research Notes, No. 99-2, Deutsche Bank Research, Frankfurt

THE RISE AND FALL OF THE EURODOLLAR SYSTEM 

SEPTEMBER 2016

Offshore Dollar Creation and the Emergence of the post-2008 International Monetary System

Steffen Murau

The Future of Offshore Dollar Creation:
Four Scenarios for the International Monetary System by 2040

Steffen Murau, Joe Rini, Armin Haas

IASS Potsdam, in collaboration with Weatherhead Center for International Affairs, Harvard University

2017 | ‘The Political Economy of Private Credit Money Accommodation. A Study of Bank Notes, Bank Deposits and Shadow Money’, PhD thesis

7th November 2017  Private Credit Money Accommodation  by Steffen Murau

https://openaccess.city.ac.uk/id/eprint/19010/

Towards a theory of shadow money

Daniela Gabor and Jakob Vestergaard

Private Debt as Shadow Money? Conceptual Criteria, Empirical Evaluation and Implications for Financial Stability

Steffen Murau1 and Tobias Pforr2 May 2020

Grey matter in shadow banking: international organizations and expert strategies in global financial governance

Cornel Bana, Leonard Seabrookeb and Sarah Freitasa

aBoston University, Boston, MA, USA; bDepartment of Business and Politics, Copenhagen Business School, Copenhagen, Denmark

The Politics of Shadow Money: Security Structures, Money Creation and Unconventional Central Banking

Pre-print version. Print version forthcoming in: New Political Economy Joscha Wullweber

Faculty of Economics University of Witten/Herdecke

REFORMING THE SHORT-TERM FUNDING MARKETS

Morgan Ricks

Discussion Paper No. 713 05/2012

Money and (Shadow) Banking: A Thought Experiment

Review of Banking and Financial Law, Vol. 31, 2011-2012

18 Pages Posted: 7 Apr 2013

Morgan Ricks

Vanderbilt University – Law School; European Corporate Governance Institute (ECGI)

Date Written: April 1, 2012

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2245685

Privatized global money: The US-Dollar and the international monetary system — Steffen Murau interviewed by Dezernat Zukunft, Part 1

By Mathis Richtmann

FX swaps and forwards: missing global debt?

Claudio Borio Robert McCauley Patrick McGuire

claudio.borio@bis.org robert.mccauley@bis.org patrick.mcguire@bis.org

The Global Financial and Monetary System in 2030

WEFORUM

Global Liquidity Indicators

BIS

https://www.bis.org/statistics/gli.htm

The Financial Crisis and the Global Shadow Banking System

La crise financière et le Global Shadow Banking System

Maryse Farhi et Marcos Antonio Macedo Cintra

https://journals.openedition.org/regulation/7473

Rise of Debt and Market Based Finance

Rise of Debt and Market Based Finance

It is also known as Non Bank finance or Shadow Banking.

The key difference between traditional banking and shadow banking is fragmented credit chains in the shadow banking.

Traditional Banking does

  • Maturity Transformation
  • Liquidity Transformation
  • Credit Transformation

While traditional banking has backstops

  • Deposit Insurance
  • Central bank

Shadow Banks are not regulated and do not have advantage of backstops.

Hence they are susceptible to systemic risk and runs.

Questions

  • What is Market based Finance?
  • How big is the market?
  • Institutions?
  • Instruments?
  • Who are the borrowers?
  • Who are the investors?
  • What are the risks in market based finance?
  • Role of Central Banks?
  • How to minimize risks?
  • Regulations? Macro Prudential policies?
  • How are banks involved in market based finance?
  • How are they connected to each other and others?

Key Terms

  • Market based Finance MBF
  • Non Bank Credit Intermediation NCBI
  • Shadow Banking
  • Financial Stability
  • Systemic Risk
  • Liquidity Risk
  • Broker Dealers
  • Non Bank Finance NBF
  • Balance Sheet Economics
  • Market Makers
  • Capital Markets
  • Money Markets
  • Money View
  • Money Flows
  • Network Dynamics
  • Regulatory Arbitrage
  • Credit Chains
  • Fragmented Credit Chains
  • Financial Supply Chains
  • Credit Chain Length
  • Growth of Debt

Growth and Size of Market based Finance

Image Source: BANK AND NONBANK LENDING OVER THE PAST 70 YEARS

Image Source: Shining a Light on Shadow Banking

Image Source: The Shadow Banking System in the United States: Recent Developments and Economic Role

Image Source: Shining a Light on Shadow Banking

Image Source: NON-BANK FINANCE: TRENDS AND CHALLENGES

Image Source: THE GROWTH OF NON-BANK FINANCE AND NEW MONETARY POLICY TOOLS 

Image Source: SHADOW BANKING AND MARKET BASED FINANCE

Structural Dynamics of Banking and Financial System

Changes prior to Global Financial Crisis

  • Rise of Debt
  • Rise of Market Based Finance
  • Increase in capital flows both domestic and cross border

Debt dynamics is related to assets side of balance sheet of financial intemediatory.

Market based Finance is related to liabilities side of balance sheet of Financial Intermediatory.

If the chains of financial intermediation are long, then both assets and liabilities of each participant are linked.

Intermediation results in increase of capital flows. From money markets to capital markets. From deposits to loans. From liabilities to assets. There is both pull and push of money flows in the financial system. Demand for capital and supply of capital. They both are linked by banks and non bank finance. Growth of debt is linked to growth of money markets and non bank finance.

Size of Nonfinancial Business and Household Credit

Image Source: FINANCIAL STABILITY REPORT – NOVEMBER 2020

In a future post I will discuss debt in US and global financial system.

Please see my related posts for evolution of Financial System Complexity and Its dynamics.

Low Interest Rates and Banks’ Profitability – Update October 2020

Funding Sources and Liquidity for US Commercial Banks

Trends in Assets and Liabilities of Commercial Banks in the USA

Size and complexity arise together. Along with balance sheet expansion comes changes in links with counterparties (financial networks and interconnections).

Research continues in this area by several institutions and academics.

  • OECD
  • BIS
  • FED RESERVE
  • ECB
  • FSB
  • BOE
  • IMF
  • BOF
  • Others

Source: Structural developments in global financial intermediationThe rise of debt and non-bank credit intermediation

The global financial crisis of 2008 underlined the importance for policy makers in understanding the scale and types of financial intermediation in their economies. During the financial crisis, non-bank financial intermediation was of particular concern to authorities, as such forms of ‘shadow banking’, contributed to both the root causes of the crisis, the transmission of financial contagion, and the amplification of shocks.

As this report is published, the rapid spread of the novel coronavirus Covid-19 has caused a global health crisis, has brought economic activity in some sectors to a halt, and has presented the greatest challenge to the global financial system since 2008. As then, understanding financial intermediation activities is critical to mapping the faultlines in the global financial system and mounting effective policy responses.

However, the shape of financial intermediation has changed in important ways since the global financial crisis. Activities in non-bank intermediation, including market-based intermediaries like investment funds and securitised products, have grown and are increasingly interconnected with financial markets. Understanding the interplay between these elements, and the benefits and risks of each, offers a more complete understanding of how global finance can contribute to sustainable economic growth. It also helps provide the full picture needed to help policy makers prepare for and respond to shocks, including pandemics.

“Structural developments in global financial intermediation: The rise of debt and non-bank credit intermediation” shines a light on the evolution of global financial intermediation in three key ways. First, it maps the broad-based growth of financial intermediation relative to GDP in many advanced and emerging market economies, and with this growth a shift toward market-based finance. Second, it assesses the shift from equity to debt markets, and the growing imbalances in sovereign and corporate debt markets during a period of highly accommodative monetary policies. Third, it draws attention to key activities in credit intermediation that could contribute to structural vulnerabilities in the global financial system, including: a sharp rise of below-investment grade corporate debt, in particular leverage loans and collateralised loan obligations; the growth of open-ended investment funds that purchase high-yield debt and leveraged loans; and risks associated with the large stock of bank contingent convertible debt.

While these various activities have helped to satisfy investors’ reach for yield during years of market exuberance, they represent new potential faultlines of systemic risk in the event of exogenous shocks, be they from trade tensions, geopolitical risks or the current global pandemic. This report underlines the need for policy frameworks to adapt to market-based finance, and fully reflect the interaction between monetary, prudential, and regulatory tools on credit intermediation. It also underlines the need for dynamic microprudential and activities-based tools to help mitigate excessive risk taking with respect to liquidity and leverage.

By mapping the global financial system, evaluating growing imbalances and risks that could amplify shocks, and assessing the interaction between macro and regulatory tools, this report provides a practical complement to the OECD’s Policy Framework for Effective and Efficient Financial Regulations. Financial authorities should use this analysis to inform both their assessments of activities and risks, and efforts to maximise available tools to harness the benefits of market-based finance to support fair, efficient markets and sustainable economic growth.

Greg Medcraft Director, OECD Directorate for Financial and Enterprise Affairs

Image Source: UNDERSTANDING THE RISKS INHERENT IN SHADOW BANKING: A PRIMER AND PRACTICAL LESSONS LEARNED

Image Source: THE ECONOMICS OF SHADOW BANKING 

Image Source: IS SHADOW BANKING REALLY BANKING?

Table Source: SHADOW BANKING AND MARKET BASED FINANCE

Table 1. A Stylized View of Structural Characteristics of Credit-based Intermediation

Characteristic:Traditional BankingShadow BankingMarket-based Finance
Key Risk TransformationsLiquidity, maturity, leverageCredit enhancement,liquidity, maturity, leverageLess emphasis on credit enhancement and less opaque vs. shadow banking
Institutions Involved in Intermediation Single entityCan be many entities, interconnected through collateral chains and credit guaranteesSingle/few entities
Formal Ex-anteBackstopYesNo / IndirectNo
Implied Sponsor Supportn.a.Yes, can sometimes be contingent liabilitiesNo(insolvency remote)
Example of EntitiesCommercial bankSynthetic CDO, Structured Investment Vehicle (SIV), CNAV MMF, ABCP ConduitBond mutual fund, Distressed debt or PE partnership,Direct lending by pension fund
Main Form of LiabilitiesDebt and deposits,Wholesale & retail-financedDebt,Mainly wholesale financedHighly diverse –Short and long-term debt and equity,Retail & wholesale financed
Key Resulting Financial Stability Risk Systemic risk(institutional spillovers)Systemic risk(institutional spillovers)Shift in price of risk (market risk premia)

My Related Posts

Shadow Banking

Economics of Broker-Dealer Banks

Evolution of Banks Complexity

Low Interest Rates and International Capital Flows

Repo Chains and Financial Instability

Global Liquidity and Cross Border Capital Flows

The Dollar Shortage, Again! in International Wholesale Money Markets

Low Interest Rates and Banks’ Profitability – Update October 2020

Funding Sources and Liquidity for US Commercial Banks

Funding Strategies of Banks

Trends in Assets and Liabilities of Commercial Banks in the USA

Key sources of Research

The growth of non-bank finance and new monetary policy tools 

Adrien d’Avernas, Quentin Vandeweyer, Matthieu Darracq Pariès  

20 April 2020

https://voxeu.org/article/growth-non-bank-finance-and-new-monetary-policy-tools

Financial Stability Report

November 2019

Board of Governors of the Federal Reserve System

Financial Intermediaries, Financial Stability, and Monetary Policy

Tobias Adrian and Hyun Song Shin
Federal Reserve Bank of New York Staff Reports, no. 346 September 2008

US BROKER-DEALER LIQUIDITY IN THE TIME OF FINANCIAL CRISIS

https://www.shearman.com/perspectives/2020/05/us-broker-dealer-liquidity-in-the-time-of-financial-crisis

Unconventional monetary policy and funding liquidity risk

ECB

Structural developments in global financial intermediation

The rise of debt and non-bank credit intermediation

by

Robert Patalano and Caroline Roulet*

OECD

https://www.oecd-ilibrary.org/finance-and-investment/structural-developments-in-global-financial-intermediation-the-rise-of-debt-and-non-bank-credit-intermediation_daa87f13-en

Financial Stability Review, May 2020

ECB

https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr202005~1b75555f66.en.html#toc1

Structural changes in banking after the crisis

Report prepared by a Working Group established by the Committee on the Global Financial System

The Group was chaired by Claudia Buch (Deutsche Bundesbank) and B Gerard Dages (Federal Reserve Bank of New York)

January 2018

BIS

BANK-BASED OR MARKET-BASED FINANCIAL SYSTEMS: WHICH IS BETTER?

Ross Levine

Working Paper 9138 http://www.nber.org/papers/w9138

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue
Cambridge, MA 02138
September 2002

Non-bank finance: trends and challenges

Financial Stability Review

Bank of France

2018

The Origins of Bank-Based and Market-Based Financial Systems: Germany, Japan, and the United States

Sigurt Vitols*

January 2001

Financial Stability Report

August 2020

Bank of England

Market-Based Finance:
Its Contributions and Emerging Issues

May 2016

Financial Conduct Authority

Bank-Based Versus Market-Based Financing: Implications for Systemic Risk

https://www.researchgate.net/publication/322088863_Bank-Based_Versus_Market-Based_Financing_Implications_for_Systemic_Risk

Off the radar: The rise of shadow banking in Europe 

Martin Hodula  

16 March 2020

https://voxeu.org/article/radar-rise-shadow-banking-europe

Global Monitoring Report on Non-Bank Financial Intermediation 2019

2020

FSB

https://www.fsb.org/2020/01/global-monitoring-report-on-non-bank-financial-intermediation-2019/

Global Monitoring Report on Non-Bank Financial Intermediation 2018

FSB 2019

https://www.fsb.org/2019/02/global-monitoring-report-on-non-bank-financial-intermediation-2018/

Global Shadow Banking Monitoring Report 2017

FSB 2018

https://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/

Global Shadow Banking Monitoring Report 2016

10 May 2017

FSB 2015 Report

FSB 2014 Report

https://www.fsb.org/wp-content/uploads/r_141030.pdf?page_moved=1

FSB 2013 Report

FSB 2012 Report

FSB 2011 Report

Shadow Banking: Monitoring Vulnerabilities and Strengthening Policy Tools

https://www.garp.org/#!/risk-intelligence/all/all/a1Z1W0000054xEzUAI

BANK-BASED AND MARKET-BASED FINANCIAL SYSTEMS: CROSS-COUNTRY COMPARISONS

Asli Demirguc-Kunt and Ross Levine*

June 1999

https://pdfs.semanticscholar.org/18e5/660bef2325f326bb8077bd0dd6f5225b1bf8.pdf?_ga=2.215410079.942675951.1605328042-1052966156.1604782392

Off the Radar: Exploring the Rise of Shadow Banking in the EU

Martin Hodula

https://www.cnb.cz/en/economic-research/research-publications/cnb-working-paper-series/Off-the-Radar-Exploring-the-Rise-of-Shadow-Banking-in-the-EU/

https://voxeu.org/article/radar-rise-shadow-banking-europe

Shadow Banking: Economics and Policy

Stijn Claessens, Zoltan Pozsar, Lev Ratnovski, and Manmohan Singh

IMF

2012

https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2016/12/31/Shadow-Banking-Economics-and-Policy-40132

Bank-Based and Market-Based Financial Systems: Cross-Country Comparisons

A. Demirguc-Kunt

Published 1999

https://www.semanticscholar.org/paper/Bank-Based-and-Market-Based-Financial-Systems%3A-Demirguc-Kunt/cd8cf558db2f8404271050ba40408a28ac4fcbc4

Market-based finance: a macroprudential view

Speech given by
Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee

BOE/BIS

Asset Management Derivatives Forum, Dana Point, California Friday 9 February 2017

Shadow Banking and Market Based Finance

Tobias Adrian, International Monetary Fund 
Helsinki

September 14, 2017

https://www.imf.org/en/News/Articles/2017/09/13/sp091417-shadow-banking-and-market-based-finance

Transforming Shadow Banking into Resilient Market-based Finance

An Overview of Progress

12 November 2015

FSB

Mapping Market-Based Finance in Ireland

Simone Cima, Neill Killeen and Vasileios Madouros1,2 

Central Bank of Ireland
December 13, 2019

BANK AND NONBANK LENDING OVER THE PAST 70 YEARS

FDIC

Financial Stability Review

November 2019

ECB

Shadow Banking

Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky

FRBNY Economic Policy Review / December 2013

https://www.newyorkfed.org/research/epr/2013/0713adri.html

Shadow Banking and Market-Based Finance

Tobias Adrian and Bradley Jones

IMF

No 18/14

Why Shadow Banking Is Bigger Than Ever

DANIELA GABOR

https://jacobinmag.com/2018/11/why-shadow-banking-is-bigger-than-ever

The Non-Bank Credit Cycle

Esti Kemp, Ren ́e van Stralen, Alexandros P. Vardoulakis, and Peter Wierts

2018-076

Fed Reserve

The role of financial markets for economic growth

Speech delivered by Dr. Willem F. Duisenberg, President of the European Central Bank, at the Economics Conference “The Single Financial Market: Two Years into EMU” organised by the Oesterreichische Nationalbank in Vienna on 31 May 2001

https://www.ecb.europa.eu/press/key/date/2001/html/sp010531.en.html

Bank deleveraging, the move from bank to market-based financing, and SME financing

Gert Wehinger

OECD

OECD Journal: Financial Market Trends Volume 2012/1
© OECD 2012

Shadow Banking: A Review of the Literature

Tobias Adrian Adam B. Ashcraft

2012 FRBNY

The Global Pandemic and Run on Shadow Banks

FRBKC

2020

https://www.kansascityfed.org/en/publications/research/eb/articles/2020/global-pandemic-run-shadow-banks

Shadow Banking: The Rise, Risks, and Rewards of Non-Bank Financial Services

Roy J. Girasa

The Macroeconomics of Shadow Banking

ALAN MOREIRA and ALEXI SAVOV∗

THE JOURNAL OF FINANCE • 2017

Is Shadow Banking Really Banking?

Bryan J. Noeth ,  Rajdeep Sengupta

Saturday, October 1, 2011

FRBSL

https://www.stlouisfed.org/publications/regional-economist/october-2011/is-shadow-banking-really-banking

Three Essays on Capital Regulations and Shadow Banking

Diny Ghuzini
Western Michigan University, diny.ghuzini@wmich.edu

CLARIFYING THE SHADOW BANKING DEBATE: APPLICATION AND POLICY IMPLICATIONS

Amias Gerety 2017

Institute of International Economic Law Georgetown University Law Center

Commercial Banking and Shadow Banking

The Accelerating Integration of Banks and Markets and its Implications for Regulation

ARNOUD W. A. BOOT AND ANJAN V. THAKOR

(prepared as revised version of Chapter 3 in The Oxford University Press Handbook, The Accelerating Integration of Banks and Markets and its Implications for Regulation, 3rd edition.)

The Shadow Banking System in the United States: Recent Developments and Economic Role

Tresor Economics

France

2013

https://www.tresor.economie.gouv.fr/Articles/ccfd4180-fddb-4333-bd16-0b91f2daa18c/files/6ae6455a-92be-43a5-a94d-91b03b38a8d8

Shadow Banking: Policy Challenges for Central Banks

Thorvald Grung Moe*

Levy Economics Institute of Bard College

May 2014

BANKS, SHADOW BANKING, AND FRAGILITY

Stephan Luck and Paul Schempp

2014 ECB

Restructuring the Banking System to Improve Safety and Soundness

Thomas M. Hoenig
Vice Chairman of the Federal Deposit Insurance Corporation

Charles S. Morris
Vice President and Economist Federal Reserve Bank of Kansas City

Original version: May 2011 Revised: December 2012

Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned

by David Luttrell Harvey Rosenblum and Jackson Thies

FRB Dallas

Shadow Banking Concerns: The Case of Money Market Funds

Saad Alnahedh† , Sanjai Bhagat

Towards a theory of shadow money

Daniela Gabor* and Jakob Vestergaard

The Economics of Shadow Banking 

Manmohan Singh

2013

Regulating the Shadow Banking System

GARY GORTON

ANDREW METRICK

Yale University

The Rise of Shadow Banking: Evidence from Capital Regulation

Rustom M. Irani, Raymakal Iyer, Ralf R. Meisenzahl, and Jos ́e-Luis Peydr ́o

2018-039

Fed Reserve

Shadow Banking: Background and Policy Issues

Edward V. Murphy

Specialist in Financial Economics

December 31, 2013

Shining a Light on Shadow Banking

The Clearing House

https://www.theclearinghouse.org/banking-perspectives/2015/2015-q4-banking-perspectives/articles/shining-a-light-on-shadow-banking

REGULATING SHADOW BANKING*

STEVEN L. SCHWARCZ

2011

Duke Law

Money Creation and the Shadow Banking System Adi Sunderam

Harvard Business School and NBER September 2014

https://dash.harvard.edu/bitstream/handle/1/27336543/sunderam_money-creation.pdf?sequence=1

Financial Crisis Inquiry Commission Report Chapter 2

Shadow Banking

THE SHADOW BANKING CHARADE

By Melanie L. Fein*

February 15, 2013

Assessing shadow banking – non-bank financial intermediation in Europe

No 10/ July 2016

by
Laurent Grillet-Aubert Jean-Baptiste Haquin Clive Jackson
Neill Killeen
Christian Weistroffer

ESRB

Shedding Light on Shadow Banking

Timothy Lane

Bank of Canada

shadow banking and capital markets

RISKS AND OPPORTUNITIES

Group of Thirty

Shadow Banking and Market Based Finance

Tobias Adrian, International Monetary Fund 
Helsinki

September 14, 2017

https://www.imf.org/en/News/Articles/2017/09/13/sp091417-shadow-banking-and-market-based-finance

Financial Stability Report – November 2020

Federal Reserve

https://www.federalreserve.gov/publications/2020-november-financial-stability-report-purpose.htm

https://www.federalreserve.gov/publications/2019-november-financial-stability-report-purpose.htm

https://www.federalreserve.gov/publications/2018-november-financial-stability-report-purpose.htm

https://www.federalreserve.gov/publications/financial-stability-report.htm

Funding Sources and Liquidity for US Commercial Banks

Funding Sources and Liquidity for US Commercial Banks

Funding Types

  • Secured
  • Unsecured
  • Short Term
  • Long Term
  • Domestic
  • Foreign

Image Source: THE DARK SIDE OF BANK WHOLESALE FUNDING

Image Source: WHOLESALE FUNDING OF THE BIG SIX CANADIAN BANKS

Canadian Banks Funding Types

Canadian Banks Funding Instruments

MAPPING U.S. DOLLAR FUNDING FLOWS

US Dollar Funding Sources and Instruments
  • Interbank Funding Market
  • Money Market Mutual Funds Market
  • Repo Market
  • Fed Funds Market
  • Commercial Paper Market
  • Asset Backed Commercial Paper Market
  • Certificate of Deposits
  • Auction Rate Securities
  • Bilateral and Tri Party Repos
  • GSEs
  • GSE Mortgage Pools
  • Finance Companies
  • Broker Dealers
  • ABS Insurers

Major Trends prior to Global Financial Crisis of 2008

  • Decline of Banks and Growth of Mutual Funds
  • Rise of Market Based Finance (Non Bank Finance, Shadow Banking)
  • Globalization of Financial Intermediation
  • Rise of Repo Market
  • Securitization

Please see detailed discussion in this reference from which I have used most of the charts.

Economic Policy Review

Federal Reserve Bank New York

Special Issue: The Stability of Funding Models, Feb 2014

Decline of Banks and Growth of Mutual Funds

Rise of MArket based Finance

Also, known as Non Bank Finance, Shadow Banking

Globalization of Financial Intermediation

Rise of Repo Market

Securitization

How did Central Banks respended during the crisis?

Central Bank Backstops During Financial Crisis

During financial crisis, US Federal Reserve has provided emergency liquidity facilities for markets in which liquidity dried up.

  • AMLF Asset Back Comercial Papers Funding Facility
  • MMLF Money MArket Mutual Funds Funding Facility
  • CPFF Commercial Paper Funding Facility

Macro Prudential Policies and Regulations

For financial stability

Some of the important policies that aim at promoting stability are as follows:

  • deposit insurance
  • lender of last resort
  • supervision
  • capital requirements
  • reserve requirements
  • liquidity requirements
  • transparency and disclosure requirements

Key Terms

  • Market based Finance
  • Shadow Banking
  • Funding LIquidity
  • Funding Sources
  • Funding Instruments
  • Bank Liabilities
  • Interlinked Balance sheets
  • Interconnectivity
  • Balance Sheet Expansion
  • Money Flows
  • Systemic Risk
  • Financial Contagion
  • Capital Requirements
  • BASEL III
  • LCR Liquidity Coverage Ratio
  • Money Market Mutual Funds MMMF
  • Asset Backed Commercial Paper ABCP
  • Commercial Paper CP
  • Repurchase Agreements REPOs
  • Fed Funds
  • Interbank Funds
  • Exposure
  • Spillover
  • Counterparties
  • Cross Border Claims
  • Quadruple accounting

My related Posts

Funding Strategies of Banks

Shadow Banking

The Dollar Shortage, Again! in International Wholesale Money Markets

Low Interest Rates and International Capital Flows

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Contagion in Financial (Balance sheets) Networks

Economics of Money, Credit and Debt

Trends in Assets and Liabilities of Commercial Banks in the USA

Low Interest Rates and Banks’ Profitability – Update October 2020

Key Sources of Research

US dollar funding markets during the Covid-19 crisis – the money market fund turmoil

12 May 2020

BIS

Mapping U.S. Dollar Funding Flows

This interactive map shows how various institutions generally engage with one another, and the Federal Reserve’s balance sheet, in the course of borrowing and lending U.S. dollar instruments in the money markets.

https://www.newyorkfed.org/research/blog/2019_LSE_Markets_Interactive_afonso

Recent stress in money market funds has exposed potential risks for the wider financial system

Prepared by Miguel Boucinha, Laura Capotă, Katharina Cera, Emmanuel Faïk, Jean-Baptiste Galléty, Margherita Giuzio, Maciej Grodzicki, Isabel Kerner, Simon Kördel, Luis Molestina Vivar, Giulio Nicoletti, Ellen Ryan and Christian Weistroffer

Published as part of Financial Stability Review, May 2020.

https://www.ecb.europa.eu/pub/financial-stability/fsr/focus/2020/html/ecb.fsrbox202005_07~725c8a7ec8.en.html

The circular flow of dollars in the world financial markets

Kashi NathTiwari

https://www.sciencedirect.com/science/article/abs/pii/104402839090012C

The Euro-dollar market as a source of United States bank liquidity

Steve B. Steib

Iowa State University

Shadow Banking: The Money View

Zoltan Pozsar

Key Information on the Money Market Mutual Fund Liquidity Facility (MMLF)

https://www.bostonfed.org/news-and-events/news/2020/03/key-information-money-market-mutual-fund-liquidity-facility.aspx

https://www.federalreserve.gov/monetarypolicy/mmlf.htm

Managing the Liquidity Crisis

April 09, 2020

https://hbr.org/2020/04/managing-the-liquidity-crisis

Financial Stability Report

May 2020

Financial Stability Board

FED Reserve

Interbank lending market

https://en.wikipedia.org/wiki/Interbank_lending_market

Liquidity Risk and Credit in the Financial Crisis

BY PHILIP E. STRAHAN

FRBSF ECONOMIC LETTER

2012

The Money Market Mutual Fund Liquidity Facility

Marco Cipriani, Gabriele La Spada, Reed Orchinik, and Aaron Plesset

2020

https://libertystreeteconomics.newyorkfed.org/2020/05/the-money-market-mutual-fund-liquidity-facility.html

US money market funds and US dollar funding

Céline Choulet

BNP Paribas

2018

The Dark Side of Bank Wholesale Funding

Rocco Huang

Philadelphia Fed

Lev Ratnovski

Bank of England

A Macroeconomic Model of Liquidity, Wholesale Funding and Banking Regulation

Corinne Dubois* Luisa Lambertini􏰀

The Effect of Monetary Policy on Bank Wholesale Funding

Dong Beom Choi (Federal Reserve Bank of New York)

Hyun-Soo Choi (Singapore Management University)

Between deluge and drought: The future of US bank liquidity and funding

Rebalancing the balance sheet during turbulent times

Kevin Buehler Peter Noteboom Dan Williams

July 2013
McKinsey & Company

https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Risk/Working%20papers/48_Future%20of%20US%20funding.ashx

Can Banks Provide Liquidity in a Financial Crisis?

By Nada Mora

How important was the worldwide use of wholesale funds for the international transmission of the US subprime crisis? 

Claudio Raddatz  15 March 2010

https://voxeu.org/article/how-bank-credit-market-funding-helped-spread-global-crisis

The Role of Liquidity in the Financial System

Notes from the Vault

Larry D. Wall
November 2015

https://www.frbatlanta.org/cenfis/publications/notesfromthevault/1511

Global Banks, Dollar Funding, and Regulation

by Iñaki Aldasoro, Torsten Ehlers and Egemen Eren

Monetary and Economic Department March 2018, revised May 2019

Global Monitoring Report on
Non-Bank Financial Intermediation 2019 

19 January 2020

Bank Financing: The Disappearance of Interbank Lending

March 05, 2018

https://www.moneyandbanking.com/commentary/2018/3/4/bank-financing-the-disappearance-of-interbank-lending

Liquidity Risk and Funding Cost

Taking Market-Based Finance Out of the Shadows

Distinguishing Market-Based Finance from Shadow Banking

2018

Blackrock

Wholesale Funding of the Big Six Canadian Banks

Matthieu Truno, Andriy Stolyarov, Danny Auger and Michel Assaf, Financial Markets Department

Bank of Canada Review

Liquidity Risk after the Crisis 

By Allan M. Malz

https://www.cato.org/cato-journal/winter-2018/liquidity-risk-after-crisis

Global Shadow Banking Monitoring Report 2017

5 March 2018

The Federal Funds Market since the Financial Crisis

https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/2017-economic-commentaries/ec-201707-the-federal-funds-market-since-the-financial-crisis.aspx

Funding liquidity regulation

Allan M. Malz

The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)

Rosalind Z. Wiggins2,
Yale Program on Financial Stability Case Study

May 9, 2017, revised: October 10, 2020

Liquidity Risk and Credit in the Financial Crisis

BY PHILIP E. STRAHAN

Economic Policy Review

February 2014 Volume 20 Number 1

Special Issue: The Stability of Funding Models

Trends in Assets and Liabilities of Commercial Banks in the USA

Trends in Assets and Liabilities of Commercial Banks in the USA

To big to fail means too interconnected to fail.
As the balance sheets of banks have expanded so has their number of counterparties on both sides of balance sheets.

The US commercial banks have have expanded their balance sheets.

On assets side, the loans portfolio has expanded.

Low Interest Rates and Banks’ Profitability – Update October 2020

On liabilities side, the deposits and borrowings have increased.

US Federal Reserve publishes H8 report on Assets and Liabilities of the US commercial banks. Detailed information on aggregate data presented in this post can be obtained from it.

https://www.federalreserve.gov/releases/h8/h8notes.htm

On liabilities side, the borrowings from wholesale money markets and shadow banking contributed to systemic risk during 2008 financial crisis. Please see my posts on this subject.

Funding Strategies of Banks

Shadow Banking

There were also capital flows in US markets from foreign banks and other markets.

Low Interest Rates and International Capital Flows

On liabilities side, because of increased borrowings from short term markets, the financial interconnections have also increased resulting in systemic risk and financial contagion.

On assets side, because of increased volumes of loan portfolios, the systemic risk and chances for financial contagion have increased.

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Contagion in Financial (Balance sheets) Networks

For analytical framework, accounting approach (Post Keynesian Economics) is one of the option.

Balance Sheet Economics – Financial Input-Output Analysis (using Asset Liability Matrices) – Update March 2018

Foundations of Balance Sheet Economics

Economics of Money, Credit and Debt

Morris Copeland and Flow of Funds accounts

Stock-Flow Consistent Modeling

Key Terms

  • Money View
  • Money Flows
  • Stocks and Flows
  • System Dynamics
  • Business Dynamics
  • Business Strategy
  • Asset Liability Management ALM
  • Balance Sheet Economics
  • Monetary Policy
  • Interest Rates
  • Credit
  • Debt
  • Money
  • Balance Sheet Expansion
  • Systemic Risk
  • Interconnectivity
  • Loan Portfolio
  • To big to fail
  • Networks
  • Funding Strategy
  • Market Liquidity
  • Funding Liquidity
  • Deposits
  • Interest Income
  • Non Interest Income
  • Borrowings
  • Wholesale Money Markets
  • Shadow Banking
  • International Capital Flows
  • Round Tripping
  • Global Liquidity
  • Eurodollar Market
  • Money Market Mutual Funds
  • Quadruple Accounting
  • Morris Copeland
  • Hyman Minsky
  • Wynn Godley
  • Perry Mehrling

Image Source: Liberty Street Economics 2017

AVERAGE NET INTEREST MARGIN OF BANKS IN THE UNITED STATES FROM 1995 TO 2019
Image Source: Statista

NET INTEREST MARGIN FOR ALL U.S. BANKS (USNIM)
Image Source: FRED

Total Assets, All Commercial Banks (TLAACBW027SBOG)
Image Source: FRED

Total Liabilities, All Commercial Banks (TLBACBW027NBOG)
Image Source: FRED

DEPOSITS, ALL COMMERCIAL BANKS (DPSACBW027SBOG)
Image Source: FRED

My Related Posts

Balance Sheet Economics – Financial Input-Output Analysis (using Asset Liability Matrices) – Update March 2018

Foundations of Balance Sheet Economics

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Funding Strategies of Banks

Economics of Money, Credit and Debt

Low Interest Rates and International Capital Flows

Low Interest Rates and Banks’ Profitability – Update October 2020

Morris Copeland and Flow of Funds accounts

Key Sources of Research

Deposits, All Commercial Banks (DPSACBW027SBOG)

https://fred.stlouisfed.org/series/DPSACBW027SBOG

Total Liabilities, All Commercial Banks (TLBACBW027NBOG)

https://fred.stlouisfed.org/series/TLBACBW027NBOG

TOTAL ASSETS, ALL COMMERCIAL BANKS (TLAACBW027SBOG)

https://fred.stlouisfed.org/series/TLAACBW027SBOG

Between deluge and drought:
The future of US bank liquidity and funding

Rebalancing the balance sheet during turbulent times

McKinsey

2013

https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Risk/Working%20papers/48_Future%20of%20US%20funding.ashx

Assets and Liabilities of Commercial Banks in the United States – H.8

https://www.federalreserve.gov/releases/h8/h8notes.htm

The geography of dollar funding of non-US banks1