The Dollar Shortage, Again! in International Wholesale Money Markets

The Dollar Shortage, Again! in International Wholesale Money Markets


During the 2008-2009 global financial crisis, There were many European Banks which got into trouble due to shortage of US Dollar funding in the whole sale international interbank market.  US Federal Reserve eventually extended currency swaps to ECB and other central banks to ease the pressure.

Is it happening now?  There is no banking crisis but there seems to be Dollar Shortage.


Foreign Exposure of European Banks

Liquidity Constraints in Global Money Markets (International Interbank Market)

  • Eurodollar Market

Non US Borrowers got funding from FX Market

  • FX Swap
  • Currency Swap

and Non Bank Sources (Shadow Banking)

  • MMMF
  • ABCP


Funding and liquidity management

Funding can be defined as the sourcing of liabilities. Funding decisions are usually, but not exclusively, taken in view of actual or planned changes in a financial institution’s assets. The funding strategy sets out how a bank intends to remain fully funded at the minimum cost consistent with its risk appetite. Such a strategy must balance cost efficiency and stability. A strategy which targets a broader funding base may entail higher operating and funding costs, but through diversity provides more stable, reliable funding. One which focuses efforts on generating home currency funding may prove more reliable in adverse times but entail higher costs in normal markets. The balance of cost and benefit will reflect a range of factors (see Section 3). Accordingly, funding risk essentially refers to a bank’s (in-)ability to raise funds in the desired currencies on an ongoing basis. Liquidity management is the management of cash flows across an institution’s balance sheet (and possibly across counterparties and locations). It involves the control of maturity/currency mismatches and the management of liquid asset holdings. A bank’s liquidity management strategy sets out limits on such mismatches and the level of liquid assets to be retained to ensure that the bank remains able to meet funding obligations with immediacy across currencies and locations, while still reflecting the bank’s preferred balance of costs (eg of acquiring term liabilities or holding low-yielding liquid assets) and risks (associated with running large maturity or currency mismatches). Accordingly, liquidity risk refers to a bank’s (in-)ability to raise sufficient funds in the right currency and location to finance cash outflows at any given point in time. Funding and liquidity management are interrelated. Virtually every transaction has implications for a bank’s funding needs and, more immediately, for its liquidity management. The maturity transformation role of banks renders them intrinsically vulnerable to both institution-specific and market-related cash flow risks. The likelihood of an unexpected cash-flow shock occurring, and a bank’s ability to cope with it, will reflect not only the adequacy of its funding and liquidity management strategies, but also their coherence under stressed conditions. A bank’s funding strategy will condition liquidity management needs. Hence, the risks embedded in the chosen funding strategy will translate into risks that liquidity management will have to address. Failure to properly manage funding risk may suddenly manifest itself as a liquidity problem, should those sources withdraw funding at short notice. Conversely, inadequate liquidity risk management may place unmanageable strains on a bank’s funding strategy by requiring very large amounts of funding to be raised at short notice.


From The Global Financial Crisis and Offshore Dollar Markets

The Global Shortage of U.S. Dollars

International firms need U.S. dollars to fund their investments in U.S.-dollar-denominated assets, such as retail and corporate loans as well as securities holdings. The funding for these investments is typically obtained from a variety of sources: the unsecured cash markets, the FX swap market, and other shortterm wholesale funding markets.

During the financial crisis, a global shortage of dollars occurred, primarily reflecting the funding needs of European banks. Baba, McCauley, and Ramaswamy (2009) show that European banks had substantially increased their U.S. dollar asset positions from about $2 trillion in 1999 to more than $8 trillion by mid-2007. Until the onset of the crisis, these banks had met their funding requirements mainly by borrowing from the unsecured cash and commercial paper markets and by using FX swaps. Unfortunately, most unsecured funding sources eroded during the crisis. For example, U.S. money market funds abruptly stopped purchasing bank-issued commercial paper after they faced large redemptions associated with the bankruptcy of Lehman Brothers (Baba, McCauley, and Ramaswamy 2009). The reduced availability of dollars resulted in higher dollar funding costs.

The remainder of this article describes the increase in dollar funding costs as reflected in the FX swap market, the primary market enabling global financial institutions to manage multi- currency funding exposures without assuming the credit risk inherent in unsecured funding markets. As liquidity in major unsecured lending markets eroded, the demand for dollar funding through FX swap markets intensified sharply and pushed up the cost of raising dollars through FX swaps. Moreover, heightened demand for dollar funding in conjunction with a reduced willingness to lend dollars noticeably impaired the functioning of the FX swap market, particularly as term liquidity dried up.


Measures of Liquidity Tightening

  • LIBOR-OIS Spread
  • FX Swap implied basis spread


Two Measures

Two measures are used to show the increased cost of dollar funds in private markets during the crisis.

  • The first is the spread between the London interbank offered rate (Libor) and the overnight index swap (OIS) rate.
  • The second measure is the foreign exchange (FX) swap implied basis spread, which reflects the cost of funding dollar positions by borrowing foreign currency and converting it into dollars through an FX swap.






What are the Money Markets

Wholesale money markets

  • Unsecured cash term deposits and loans
  • Money market calculations and conventions
  • Benchmark rates and their determination
  • Libor
  • Euribor
  • Overnight indexed rates such as Eonia and Sonia
  • Treasury bills (a first look at risk-free)
  • Commercial Paper – CP credit ratings
  • Secured money market loans – sale and repurchase agreements (Repos)


Money market derivatives

  • Short term interest rate futures (STIRs): Eurodollar, Short Sterling and Euribor futures
  • Forward rate agreements
  • Interest rate swaps
  • Overnight index swaps (OIS): Sonia and Eonia swaps
  • Monetary policy and the money markets

How a central bank uses money markets to transmit its interest rate intentions.



OTC US Dollar Money Markets:  Sources of short term Funding

A.  Fed Funds Market (Domestic)

B.  Interbank Money Market

  • Cash Market
  • Market for Short Term Securities
  • Market for Derivatives

Cash Market

  • Unsecured – Eurodollar
  • Secured – REPO
  • Secured (Collateralized markets) – FX Swap Market

Short Term Securities Market

  • T-Bills
  • Commercial Paper
  • Certificate of Deposits

Derivatives Market

  • Interest Rates Swaps



Money Markets in EU

In the unsecured market, activity is concentrated on the overnight maturity segment. The reference rate in this segment is the Eonia (Euro Overnight Index Average). It is a market index computed as the weighted average of overnight unsecured lending transactions undertaken by a representative panel of banks. The same panel banks contributing to the Eonia also quote for the Euribor (Euro Interbank Offered Rate). The Euribor is the rate at which euro interbank term deposits are offered by one prime bank to another prime bank. This is the reference rate for maturities of one, two and three weeks and for twelve maturities from one to twelve months.11

The market for short term securities includes government securities (Treasury bills) and private securities (mainly commercial paper and bank certificates of deposits).

In the market for derivatives, typically interest rate swaps and futures are traded.


Is it happening again?

Policy Decisions such as

  • Rising Interest Rates
  • Stronger Dollar
  • Repatriation of Corporate profits from Europe
  • Unwillingness to extend of CB Swap Lines

can cause liquidity crisis which show up in

  • LIBOR rate
  • Eurodollar rate
  • OIS Rate
  • CIP breakdown


Breakdown of CIP – Then and Now




A brief history of the three key periods of global USD-funding shortfalls:

  • The first episode immediately after the Lehman bankruptcy coincided with a US banking crisis that quickly became a global banking crisis via cross border linkages. Financial globalization meant that Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Lehman crisis made both European and Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert euro or yen funding into dollar funding as they were unable to access dollar funding markets directly.
  • The second episode of very negative dollar basis took place during the Euro debt crisis. The sovereign crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage. European banks and companies that had dollar assets to fund had to pay a hefty premium in fx swap markets to convert their euro funding into dollar funding. Those European banks and companies that were unable to do so, were forced to liquidate dollar assets such as dollar denominated bonds and loans to reduce their need for dollar funding
  • The third phase of very negative dollar basis started at the end of last year. Monetary policy divergence has for sure played a role during the end of 2014 and the beginning of this year. The ECB’s and BoJ’s QE has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections raising the supply of euro and yen funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis. And we did see these funding imbalances in cross border corporate issuance.


Emergent and Related Issues:

  • Global Liquidity
  • Offshore Dollar Money Markets
  • Eurodollar Market
  • International Lender of Last Resort
  • FX Swaps and Currency Swaps Market
  • Cross border funding
  • International Interbank Market
  • Shadow Banking – MMMF, ABCP,
  • Covered Interest Parity (CIP) Breakdown
  • Wholesale Funding Market
  • Global Credit
  • Credit Markets
  • Impact of Global Liquidity on Global Trade
  • Credit Networks of Global Banks
  • International Investment Positions of Banks
  • Derisking by global banks
  • Decline in Correspondent Banking
  • Shortage of Trade Finance


Why has Global Trade dropped so precipitously since 2014?

Is it because of shortage of US Dollars?





Key Sources of Research:


“This Is An Extremely Serious Problem” – Dollar Funding Shortage Hits Record In Japan




Global Dollar Shortage Intensifies To Worst Level Since 2012




Dollar Illiquidity Getting Critical: A $10 Trillion Short Which The Fed Does Not Understand




The VIX Is Dead: According To The BIS, This Is The New “Fear Indicator”




New ICC survey finds worsening global shortage of trade finance




A ‘dollar shortage’ has returned. This is why




Dollar shortage *alert* (plus global trade *alert*)




As goes correspondent banking, so goes globalisation




How do you solve a problem like de-globalisation?




On the ongoing demise of globalisation




Textbook defying global dollar shortages




The Coming Dollar Shortage



Dollar Shortage Goes Mainstream: When Will The Fed Confess?




The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different”




The US dollar has been on a tear, and that will spell bad news for the rest of the world



There is a war for capital coming, says UBS




The eurodollar as an economic no-man’s land





Eurodollars, China, TIC data + mysteries




Petrodollars are eurodollars, and eurodollar base money is shrinking




All about the eurodollars




A global reserve requirement for all those eurodollars




On the availability of dollar funding




The dollar shortage problem, evaluated




All about the eurodollars, redux




BIS says we should follow the money




Eurodollars, FX reserve managers and the offshore RRP issue




The BoE as eurodollar dealer of last resort?




FT:  The Eurodollar Market: It All Starts Here




From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers

N Baba



Dollar Funding and Global Banks

Jeremy C. Stein



Click to access stein20121217a.pdf



The US dollar shortage in global banking and the international policy response

by Patrick McGuire and Götz von Peter

October 2009


Click to access work291.pdf



The US dollar shortage in global banking


Patrick McGuire Goetz von Peter


Click to access treasury_1196.pdf




Emergent International Liquidity Agreements: Central Bank Cooperation after the Global Financial Crisis

Daniel McDowell


Click to access mcdowell_eln.pdf



The Financial Crisis through the Lens of Foreign Exchange Swap Markets

Crystal Ossolinski and Andrew Zurawski



Click to access bu-0610-7.pdf



The spillover of money market turbulence to FX swap and cross-currency swap markets

N Baba



Click to access r_qt0803h.pdf



Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel During the European Sovereign Crisis

Ricardo Correa, Horacio Sapriza, and Andrei Zlate



Click to access ifdp1059.pdf




John L. Simpson


Click to access 00463515e5285b6a85000000.pdf



Systemic risk in the major Eurobanking markets: Evidence from inter-bank offered rates

J.L. Simpson, J.P. Evans



Click to access jou2-2.pdf



The Eurocurrency interbank market: potential for international crises?.

Saunders, Anthony.

Business Review (1988): 17-27.



The Great Liquidity Freeze: What Does It Mean for International Banking?

Dietrich Domanski and Philip Turner

June 2011


Click to access adbi-wp291.pdf



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

Steve B. Steib



The LIBOR Eclipse: Political Economy of a Benchmark

Alexis Stenfors1 and Duncan Lindo

January 2016

Click to access RMF-47_Stenfors-Lindo.pdf



Basics of U.S. Money Markets



Click to access 05.10.2016-moneymarkets-9.15am.pdf



Implementing Monetary Policy – Short-term Money Markets Monitoring



Click to access 09.29.2015-mmarketsv2-1.30pm.pdf



The Dollar Squeeze of the Financial Crisis

Jean-Marc Bottazzia Jaime Luqueb

Mario R. Pascoac Suresh Sundaresand


Click to access 6611902.pdf



Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs





The Global Financial Crisis and Offshore Dollar Markets

Niall Coffey, Warren B. Hrung, Hoai-Luu Nguyen, and Asani Sarkar





When and how US dollar shortages evolved into the full crisis?: Evidence from the cross-currency swap market

Naohiko Baba* and Yuji Sakurai†


Click to access sem_paper_0_349_naohiko-baba.pdf





Funding patterns and liquidity management of internationally active banks



The functioning and resilience of cross-border funding markets



Click to access cgfs37.pdf




The Impact of the Financial Crisis on Cross-Border Funding

Yaz Terajima, Harri Vikstedt, and Jonathan Witme



Click to access fsr-0610-terajima.pdf



Financial Crises and Risk Premiums in International Interbank Markets 

Shin-ichi Fukuda

Mariko Tanaka


Click to access ppr020f.pdf



Dollar Funding and the Lending Behavior of Global Banks

Victoria Ivashina

David S. Scharfstein

Jeremy C. Stein

October 2012

Click to access dollar_funding_october_2012_final.pdf



Financial crises and bank funding: recent experience in the euro area

by Adrian van Rixtel and Gabriele Gasperini

March 2013


Click to access work406.pdf



The Financial Crisis and Money Markets in Emerging Asia

Robert Rigg and Lotte Schou-Zibell

No. 38 | November 2009


Click to access wp38-financial-crisis-money-markets.pdf



Money Market Integration

Leonardo Bartolini Spence Hilton Alessandro Prati


Click to access sr227.pdf



Segmentation in the U.S. Dollar Money Markets During the Financial Crisis

James J. McAndrews

May 19, 2009


Click to access Session2.pdf



Re-thinking the lender of last resort

September 2014


Click to access bispap79.pdf



Towards an International Lender of Last Resort

Stephen G. Cecchetti

September 2014



Global Liquidity: Public and Private

Jean-Pierre Landau



The Global Dollar System

Stephen G Cecchetti

Click to access Polp61.pdf



US dollar money market funds and non-US banks

Naohiko Baba Robert N McCauley Srichander Ramaswamy



Click to access r_qt0903g.pdf



Improving the Resilience of Core Funding Markets


Bank of Canada

Jean-Sébastien Fontaine, Jack Selody, and Carolyn Wilkins



How do Global Banks Scramble for Liquidity? Evidence from the Asset- Backed Commercial Paper Freeze of 2007*

by Viral V. Acharya Gara Afonso Anna Kovner

October 24, 2012



The Financial Crisis and Money Markets in Emerging Asia

Robert Rigg and Lotte Schou-Zibell

No. 38 | November 2009



Regulatory Reforms and the Dollar Funding of Global Banks:

Evidence from the Impact of Monetary Policy Divergence

Tomoyuki Iida

Takeshi Kimura

Nao Sudo



Click to access wp16e14.pdf



Monetary policy spillovers and currency networks in cross-border bank lending

by Stefan Avdjiev and Előd Takáts

March 2016


Click to access work549.pdf




Prepared by Cho-Hoi Hui, Hans Genberg and Tsz-Kin Chung



Click to access HKMAWP09_13_full.pdf



Deviations from Covered Interest Rate Parity

Wenxin Du  Alexander Tepper  Adrien Verdelhan

January 1, 2016



Limits to Arbitrage and Deviations from Covered Interest Rate Parity

James Pinnington1 and Maral Shamloo

Click to access sdp2016-4.pdf



Capital Constraints, Counterparty Risk, and Deviations from Covered Interest Rate Parity

Niall Coffey Warren B. Hrung Asani Sarkar

September 2009

Click to access sr393.pdf



Covered interest parity lost: understanding the cross-currency basis

Claudio Borio Robert McCauley Patrick McGuire Vladyslav Sushko


Click to access r_qt1609e.pdf



Bye-bye covered interest parity

Claudio Borio, Robert McCauley, Patrick McGuire, Vladyslav Sushko

28 September 2016

Repo Chains and Financial Instability

Repo Chains and Financial Instability

There are three issues with Repos.

  • Repo chains as source of instability
  • Impact of Repo on Money Supply
  • Re-hypothecation: Reuse of Repo and Leverage


From Collateral Shortages and Intermediation Networks


In the pre-crisis period, financial markets witnessed a growing reliance on short-term funds raised in wholesale markets. In particular, there was a dramatic rise in the use of sales and repurchase (repo) agreements to fund longer-term investment opportunities or to finance inventories of securities held for market-making purposes. Given that such funding opportunities were secured by collateral, they were mostly considered to be safe. Since the crisis of 2007–8, however, the repo and the asset-backed commercial paper (ABCP) markets have been viewed as one of the potential sources of fragility in the financial system, with conventional wisdom (partially) attributing the collapse of Bear Stearns, Lehman Brothers, and Northern Rock to their reliance on wholesale funding.


From The Economics of Collateral Chains


The ‘supply’ of pledged collateral is typically received by the central collateral desk of banks that re-use the collateral to meet the ‘demand’ from the financial system. The key providers of primary (or source) collateral to the ‘street’ (or large banks) are: hedge funds; securities lending (via custodians) on behalf of pension funds, insurers, official sector accounts, etc. and commercial banks that liaise with large banks. The securities they hold are continuously re-invested to maximize returns over their maturity tenor. Source collateral is collateral that can be re-pledged, creating dynamic collateral chains. The term re-pledged is a legal term and means that the dealer receiving the collateral has the right to reuse in its own name.  Since a single piece of source collateral can be re-used several times by several different intermediaries, the aggregate volume of repledged collateral reflects both the availability of collateral (that is collateral from the source) as well as the velocity (or reuse rate) of source collateral.


From The Economics of Collateral Chains


The ratio of the total collateral received by the large banks divided by the ‘source’ collateral is the velo- city of collateral due to the intermediation by the street. For end-2007, the numerator of $10 trillion is what the large banks received in pledged collateral. We then compare it to the denominator or the primary sources of collateral via the hedge funds and security lenders acting on behalf of pension, insurers, official accounts, etc. − this was about $3.4 trillion. Empirical evidence suggests that the chains were longer pre-Lehman and around 3 as of end-2007; they have decreased to about 2.4 as of end-2010. Intuitively, this means that collateral from a primary source now takes ‘fewer steps’ to reach the ultimate client. This is due to the concern of source collateral providers about counterparty risk of the large banks, and also from the demand for higher quality collateral by the ultimate clients. Lower quality collateral is difficult to move in the present time.


From The Economics of Collateral Chains


This decline in the re-use of collateral may be viewed positively from a financial stability perspective. However, from a monetary policy perspective, the lubrication in the global financial markets is now lower as the velocity of money type instruments has declined. The shorter “chains” − from constraining the collateral moves lowers global financial lubrication will increase overall cost of capital to the real economy.

Overall, global liquidity remains below pre-Lehman levels. When we consider collateral use/re-use in addition to M2 or the monetary base in U.S., U.K. and Eurozone, financial lubrication was over $30 trillion before Lehman (and one-third came via pledged collateral); now it is lower by about $4-5 trillion. Since cross-border funding is important for large banks, allowing for the efficient arbitrage of their funding operations, (e.g., consider the recent surge in the demand for U.S. dollar funding by European banks), the state of the pledged collateral market needs to be considered when setting monetary policy.


Key Sources of Research:


Velocity of Pledged Collateral: Analysis and Implications

Manmohan Singh

November 2011


Sizing Up Repo 

Arvind Krishnamurthy   Stefan Nagel

Dmitry Orlov

June 2011


Click to access Sizing-up-repo_June29.pdf



Jason Roderick Donaldson Eva Micheler

January 2, 2016


Click to access


Infante, S. (2015).

Liquidity windfalls: The consequences of repo rehypothecation.

Technical report, Federal Reserve Board of Governors Finance and Economics Dis- cussion Series 2015-22.


Kahn, C. M. and H. J. Park


Collateral, rehypothecation, and efficiency.

UIUC Working paper.


Lee, J. (2015).

Collateral circulation and repo spreads.

Technical report


Singh, M. (2010).

The velocity of pledged collateral.

Technical report, IMF.


Singh, M. and J. Aitken (2010).

The (sizable) role of rehypothecation in the shadow banking system.

Technical report, IMF.


Gorton, G. and A. Metrick (2010).


Review (Nov), 507–520.


Gorton, G. and A. Metrick (2012).

Securitized banking and the run on repo.

Journal of Financial Economics 104(3), 425–451.


Copeland, A., A. Martin, and M. Walker (2014).

Repo runs: Evidence from the tri- party repo market.

The Journal of Finance 69(6), 2343–2380.


Antinolfi, G., F. Carapella, C. Kahn, A. Martin, D. Mills, and E. Nosal (2014).

Repos, Fire Sales, and Bankruptcy Policy.

Review of Economic Dynamics, (forthcoming).


Financial Intermediation Networks

Marco Di Maggio† Alireza Tahbaz-Salehi

March 2015

Click to access Intermeidation-March2015.pdf


Collateral Shortages and Intermediation Networks

Marco Di Maggio  Alireza Tahbaz-Salehi

October 1, 2015


The political economy of repo markets

Daniela Gabor

Click to access gabor_political_economy_of_repo_markets.pdf


Collateral Risk, Repo Rollover and Shadow Banking

Shengxing Zhangú

August 28, 2014


Click to access Zhang%20paper.pdf


Shadow Interconnectedness: The Political Economy of (European) Shadow Banking

Daniela Gabor

September 16, 2013


Systemic Risk, Contagion, and Financial Networks: A Survey

Matteo Chinazzi Giorgio Fagiolo

June 3, 2015


A Map of Collateral Uses and Flows


Andrea Aguiar Richard Bookstaber Dror Y. Kenett Thomas Wipf

Click to access OFRwp-2016-06_Map-of-Collateral-Uses.pdf


Aguiar, A., R. Bookstaber, and T. Wipf.

“A Map of Funding Durability and Risk.”

Office of Financial Research Working Paper no. 14-03, 2014.


Baklanova, V.,

“Repo and Securities Lending: Improving Transparency with Better Data.”

Office of Financial Research Brief no. 15-03, 2015.


Baklanova, V., A. Copeland, and R. McCaughrin.

“Reference Guide to U.S. Repo and Securities Lending Markets.”

Office of Financial Research Working Paper no. 15-17, 2015.


Shadow Banks and Systemic Risks

Rui Gong Frank H. Page Jr.

July 23, 2015


Financial Contagion with Collateralized Transactions: A Multiplex Network Approach

Gustavo Peralta  Ricardo Crisóstomo

July 2016


Non-bank financial institutions: Assessment of their impact
on the stability of the financial system


Click to access ecp472_en.pdf


Taxonomy of Studies on Interconnectedness

Gazi Kara  Mary H. Tian Margaret Yellen

December 15, 2015



Financial Plumbing and Monetary Policy

Manmohan Singh

June 2014


Click to access wp14111.pdf


Haircuts and Repo Chains

Tri Vi Dang

Gary Gorton

Bengt Holmström

Click to access Paper_Repo.pdf


Nonbank Financial Intermediation, Financial Stability, and the Road Forward

Stanley Fischer


Click to access fischer20150330a.pdf


Financial Intermediation Chains in an OTC Market

Ji Shen  Bin Wei  Hongjun Yan

December 15, 2015


Dealer Networks

Dan Li Norman Schürhoff

October 22, 2014


Systemic Risks in Repo Markets


Somnath Chatterjee


8, November 2013

Click to access 2013-operacionalizacion-estabilidad-financiera-t-07.pdf


Systemic risk in the repo market.


Alexander Shkolnik

Click to access fmws1_12590.pdf


The Economics of Collateral-Chains

Manmohan Singh



Click to access 010112.pdf


Collateral Reuse as a Direct Funding Mechanism in Repo Markets

George Issa Elvis Jarnecic

Click to access EFMA2016_0566_fullpaper.pdf


Repo Runs

Antoine Martin David Skeie Ernst-Ludwig von Thadden

Click to access sr444.pdf


Securitized Banking and the Run on Repo

Gary Gorton

Andrew Metrick

First version: January 22, 2009 This version: November 13, 2009

Click to access gorton_run_on_repo_nov.pdf


Who Ran on Repo?

Gary Gorton, Andrew Metrick

October 4, 2012

Click to access whorancompleteoctober4.pdf


Repo Runs: Evidence from the Tri-Party Repo Market

Adam Copeland Antoine Martin Michael Walker

Click to access sr506.pdf


Matching Collateral Supply and Financing Demands in Dealer Banks


Adam Kirk, James McAndrews, Parinitha Sastry, and Phillip Weed


Click to access 1412kirk.pdf


Collateral Reuse in Shadow Banking and Monetary Policy

Ameya Muley∗

7th January 2016


Money for Nothing: The Consequences of Repo Rehypothecation

Sebastian Infante

Federal Reserve Board September 19th, 2014 Abstract


Intermediary Funding Liquidity and Rehypothecation as Determinants of Repo Haircuts and Interest Rates

Egemen Eren

Stanford University July 23, 2014

Click to access eren2014.pdf


Re-use of collateral in the repo market

Lucas Marc Fuhrer, Basil Guggenheim and Silvio Schumacher


Click to access working_paper_2015_02.n.pdf


Collateral Reuse as a Direct Funding Mechanism in Repo Markets

George Issa Elvis Jarnecic


Click to access EFMA2016_0566_fullpaper.pdf


Rehypothecation and Liquidity

David Andolfatto Fernando M. Martin  Shengxing Zhang



Matching Prime Brokers and Hedge Funds∗

Egemen Eren†


December 23, 2015

Click to access eren_jmp.pdf


Collateral, Rehypothecation, and Efficiency

Charles M. Kahn† Hye Jin Park‡

Last updated: April 15, 2015

Click to access Collateral_Rehypothecation_and_Efficiency.pdf


The market for Collateral: the Potential impact of Financial Regulation

Jorge Cruz Lopez, Royce Mendes and Harri Vikstedt

Click to access fsr-0613-lopez.pdf



David Andolfatto Fernando Martin Shengxing Zhang

February 26, 2014

Click to access andolfatto_spring2014.pdf


Collateralized Security Markets

John Geanakoplos William R. Zame

Click to access refs4661465000000000040.pdf




Click to access brq411_Rehypothecation.pdf


Collateral and Monetary Policy

Manmohan Singh


Click to access wp13186.pdf


Financial Plumbing and Monetary Policy

Prepared by Manmohan Singh

June 2014

Click to access wp14111.pdf


Understanding the role of collateral in financial markets

M Singh


Click to access 20150223-singh-slides.pdf


Systemic Risk and Stability in Financial Networks

Daron Acemoglu Asuman Ozdaglar Alireza Tahbaz-Salehi
This version: January 15, 2013



Systemic Risk in Endogenous Financial Networks

Daron Acemoglu Asuman E. Ozdaglar Alireza Tahbaz-Salehi

January 22, 2015


Towards a theory of shadow money

Daniela Gabor and Jakob Vestergaard

Click to access Towards_Theory_Shadow_Money_GV_INET.pdf


Do Shadow Banks Create Money?

Jo Michell

Click to access 1602.pdf


How Does Monetary Policy A􏰝ffect Shadow Bank Money Creation? 

Kairong Xiao†

June 17, 2016

Click to access paper_296.pdf


The Economic Consequences of ‘Market-Based’ Lending

Carolyn Sissoko

May 24, 2016


Key Mechanics of the U.S. Tri-Party Repo Market

Adam Copeland, Darrell Duffie, Antoine Martin, and Susan McLaughlin


Click to access 1210cope.pdf


The Failure Mechanics of Dealer Banks

Darrell Duffie


Click to access DuffieFailureMechanicsDealerBanks2010.pdf


The Euro Interbank Repo Market

Loriano Mancini Angelo Ranaldo Jan Wrampelmeyer

March 26, 2014

Click to access angeloranaldopaper_4.pdf




Bring back M3 – Monetary Aggregate

Bringback M3 even if it does not include all of Shadow Money and Eurodollars.

The crisis of 2008-9 was partly due to run on Repos.  But Fed Reserve had no visibility in this market.  Because Fed had discontinued reporting M3 in 2006.

From Death of M3 : The fifth anniversary.

Five years ago, in November 2005, the Federal Reserve announced that it would no longer be tracking the aggregate money supply. It issued a terse, cryptic 143-word press release entitled the “Discontinuance of M3.” M3 was the broadest member of the big 4 of monetary aggregates published by the Fed — M0, M1, M2, and M3 that the Fed had compiled monthly since 1959.

John Williams of Shadowstats noted the oddity of the announcement, opining that M3 was probably the most important statistic produced by the Fed and the best leading indicator of economic activity and inflation. The Fed’s lack of interest in the components of M3 can be directly linked to its inability to foresee the 2008 collapse of the financial system.

The American fiat, credit-money system starts with the Fed-supplied monetary base and pyramids upward through commercial banks, investment banks, offshore banks, nonbanks, and other credit providing entities. The “Ms” provide the Fed’s calculation of the money levels at different tiers of the credit pyramid to the markets.

With this decision, $3.3 trillion (the difference between M3 and M2) effectively disappeared off the Federal Reserve and the market’s radar screen. The Fed also stated that it would cease publication of Eurodollar, Repo, and institutional time-deposit data, though some intrepid analysts reconstruct this data by taking snapshots of the Fed’s balance sheet.

The two now-missing components of M3, Eurodollars and repos, are the “Wild West” of the money supply. Eurodollars are US dollar deposits held by non-US banks in places like London, the Bahamas, the Cayman Islands, and Iceland (while it lasted). They are not subject to US regulations and therefore can be levered up, free of reserve or reporting requirements. Eurodollar banks have been known to operate at 50:1 leverage ratios.

Repos are short-term, often overnight, loans made to financial companies that are collateralized by securities in the possession of the borrowing company. They are a critical financing source for investment-bank trading and lending businesses. In the early years of the repo market, the primary collateral was US Treasury Securities. Today, the primary collateral consists in complex derivative securities, such as asset-backed securities (RMBS/CMBS/ABS), collateralized loan obligations (CLOs), and collateralized derivative obligations (CDOs). Repos are also not subject to reserve or reporting requirements, leading to high leverage ratios in investment banks (e.g., Lehman Brothers at 30:1).

“If the Fed had been tracking repos in 2007–2008, what they would have seen was the unfolding of the financial crisis one full year before it went critical.”

M3 was a highly imperfect statistic in that it did not capture the full extent of the leverage. On Eurodollars, M3 only included Eurodollar deposits held by American bank holding companies. Given that the vast majority of Eurodollar activity takes place overseas through foreign banks, this is analogous to monitoring the global oil supply by sampling production data out of Alaska. On repos, the Fed only tracked repos beween itself and its primary dealers. According to Yale economists Gary Gorton and Andrew Metrick, there are no official statistics on the overall size of the repo market. They estimate that the Fed’s balance sheet could account for only $4.5 trillion of the overall $12 trillion repo market in 2008, making it even larger than the $10 trillion in assets in the US banking system.1 In other words, the repo market is bigger than the US banking system, but is unaccounted for by the Fed.

10004 table_0

If the Fed had been tracking repos in 2007–2008, what they would have seen was the unfolding of the financial crisis one full year before it went critical. From Q3 2007 through Q2 2008, the repo market was starting to seize with lenders starting to demand higher and higher haircuts on collateral. In early Q1 2008, Shadowstats estimates that the rate of M3 growth started to decline rapidly as repo activity cooled. Then in September 2008, the repo market decided that it was unwise to lend additional funds to Lehman Brothers and the rest is history.

Let us now return to the curious press release of November 10, 2005. The Fed explained its decision to stop collecting and publishing the data as follows:

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. … M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.

The Fed’s statement boils down to three reasons for the discontinuance:

  • M3 does not provide additional information. This statement would only be true to an economist who believed that the aggregate money supply was unimportant.
  • M3 does not play a role in monetary policy. As Bernanke has now shown through various money-printing initiatives — QE1, QE2, TARP, TALF, etc. — he is truly unconcerned with the aggregate money supply and therefore it does not play a role in monetary policy.
  • M3 is too expensive to collect. The Fed estimated that it spent $500,000 per year to collect the data and banks spent $1,000,000 in aggregate to provide the data. This expense is not even a rounding error against the $21.5 billion in (paper) profit that the Fed reported in 2005.

November 2005 was the interregnum between the long tenure of Alan Greenspan and newly appointed Chairman Bernanke. Most of the media coverage of the Fed at the time was a celebration of the Maestro and his wise stewardship of the economy. Thus, there was almost no reporting or domestic criticism of the discontinuance of M3. There were many concerns expressed by sophisticated fund managers, analysts, and foreign investors (central banks). There was also one meek and humorous attempt by Congress to inquire into the M3 decision. Here is a wonderful snippet of Bernanke doublespeak from November 15, 2005:

Senator Bunning: The findings of the M3 report provide pertinent information to the public — from economists to investors and to industries which all use M3 report findings for economic forecasting, investing and business decisions. … Will you work to reverse this policy and commit to keeping the M3 report and its findings available and open to the public? What is the rationale and reasoning behind the Federal Reserve decision to keep the M3 information from the public?

Bernanke: The Federal Reserve will not withhold the M3 data from the public; rather, it will no longer collect and assemble that information.


Key Source of Research:


Death of M3: The Fifth Anniversary


Shadow Banking


What is Shadow Banking?


The key characteristics of shadow banking as conceived by regulators are credit intermediation in the capital markets, maturity transformation, leverage, and susceptibility to runs. The principal shadow banking activities and entities identified by regulators include the following:

  • Securitization vehicles such as asset-backed commercial paper conduits (ABCP) and structured investment vehicles (SIVs);
  • Securities lending;
  • Repurchase agreements;
  • Money market funds;
  • Securities broker-dealers;
  • Investment funds, including exchange traded funds and hedge funds that provide credit or are leveraged;
  • Finance companies, including auto finance companies and leasing companies;
  • Providers of credit insurance and financial guarantees.

Do Banks BHC /FHC participate in Shadow Banking?


All of the activities classified by regulators as shadow banking are core activities of large banking organizations, both directly and through affiliated entities. It is anomalous to call them “shadow” activities since they occur in the supervisory headlights of banking regulators.

The shadow banking system could not exist without banks and their affiliates. Banks are instrumental in the securitization of assets, which forms the backbone of the shadow banking system. They have been the primary sponsors, issuers, and guarantors of mortgage-backed securities and asset-backed commercial paper for years. Large banks command the repo market as borrowers, lenders, dealers, and custodian banks. They are leaders in securities lending activities. Banks also sponsor and advise numerous types of investment funds, including hedge funds and approximately one-half of all money market funds. All of the major securities broker-dealers in the United States are subsidiaries of banks or bank holding companies. Banking organizations control finance companies of all kinds, including auto finance and leasing companies. They provide credit insurance and financial guarantees to support their activities and those of their customers. To the extent shadow banking has any meaning, regulated banks and their affiliates are an integral part of it.

From Shadow Banking 2010 Zoltan Pozsar

Shadow credit intermediation includes three broad types of activities, differentiated by their strength of official enhancement: implicitly-enhanced, indirectly-enhanced, and unenhanced. The shadow banking system has three sub-systems which intermediate different types of credit, in fundamentally different ways. The government-sponsored shadow banking sub-system refers to credit intermediation activities funded through the sale of Agency debt and MBS, which mainly includes conforming residential and commercial mortgages. The “internal” shadow banking sub- system refers to the credit intermediation process of a global network of banks, finance companies, broker-dealers and asset managers and their on- and off-balance sheet activities—all under the umbrella of financial holding companies. Finally, the “external” shadow banking sub-system refers to the credit intermediation process of diversified broker-dealers (DBDs), and a global network of independent, non-bank financial specialists that include captive and standalone finance companies, limited purpose finance companies and asset managers. 

Why did Shadow Banking arise?


The principal drivers of the growth of the shadow banking system have been the transformation of the largest banks since the early-1980s from low return on-equity (RoE) utilities that originate loans and hold and fund them until maturity with deposits, to high RoE entities that originate loans in order to warehouse and later securitize and distribute them, or retain securitized loans through off- balance sheet asset management vehicles. In conjunction with this transformation, the nature of banking changed from a credit-risk intensive, deposit-funded, spread-based process, to a less credit-risk intensive, but more market-risk intensive, wholesale funded, fee-based process. The transformation of banks occurred within the legal framework of financial holding companies (FHC), which through the acquisition of broker-dealers and asset managers, allowed large banks to transform their traditional process of hold-to-maturity, spread-banking to a more profitable process of originate-to-distribute, fee-banking.



Key Sources of research:


Shadow Banking

Pozsar, Zoltan; Adrian, Tobias; Ashcraft, Adam; Boesky, Hayley (2010)


Click to access 635902451.pdf


Regulating the Shadow Banking System




Click to access 2010b_bpea_gorton.PDF


Bagehot was a Shadow Banker: Shadow Banking, Central Banking, and the Future of Global Finance
Perry Mehrling , Zoltan Pozsar , James Sweeney , Daniel H. Neilson

November 5, 2013





What is Shadow Banking?
Stijn Claessens , Lev Ratnovski

February 2, 2015


Shadow banking: A review of the literature

Adrian, Tobias; Ashcraft, Adam B. (2012)


Click to access 72934388X.pdf


Shadow Banking Regulation
Tobias Adrian

Adam B. Ashcraft

April 1, 2012


Shadow Banking: Economics and Policy

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


Click to access sdn1212.pdf


Shadow Banking: The Money View
Zoltan Pozsar

July 2, 2014


Securitized banking and the run on repo

Gary Gorton Andrew Metrick

Click to access Gorton-Metrick-run-on-the-Repo.pdf


Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007
Gary B. Gorton

May 9, 2009


Three Principles for Market-based Credit Regulation

Perry Mehrling

December 31, 2011


Shadow banks and macroeconomic instability

Roland Meeks,Benjamin D Nelson and Piergiorgio Alessandri

Click to access wp487.pdf


Is Shadow Banking Really Banking?


Click to access shadow_banking.pdf


The global financial crisis and the shift to shadow banking

Nersisyan, Yeva; Wray, L. Randall (2010)

Click to access 621628174.pdf


The Nonbank-Bank Nexus and the Shadow Banking System

Zoltan Pozsar and Manmohan Singh



Banks, Shadow Banking, and Fragility

Luck, Stephan; Schempp, Paul (2015)



The Growth of Modern Finance

Robin Greenwood

David Scharfstein

July 2012

Click to access Greenwood-Scharfstein.pdf


Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System

Zoltan Pozsar

Click to access 8ae8ad1c-c43a-11e0-ad9a-00144feabdc0.pdf



By Melanie L. Fein

February 15, 2013

Click to access 2013–Shadow_banking_March_4.pdf


Shadow Banking and the Funding of the Nonfinancial Sector


Joshua Gallin 2013

Click to access 201350pap.pdf


Mapping the Shadow Banking System Through a Global Flow of Funds Analysis

Luca Errico, Artak Harutyunyan, Elena Loukoianova, Richard Walton, Yevgeniya Korniyenko, Goran Amidžić, Hanan AbuShanab, Hyun Song Shin


Click to access 0deec52f13ce3ceefa000000.pdf


What Drives the Shadow Banking System in the Short and Long Run?

John V. Duca


Click to access wp1401.pdf


The Economics of Shadow Banking

Manmohan Singh

Click to access singh.pdf


Financial stability policies for shadow banking

Adrian, Tobias (2014)

Click to access 779367677.pdf


How Capital Regulation and Other Factors Drive
the Role of Shadow Banking in Funding Short-Term Business Credit

John V. Duca

October 2014

Click to access Duca%20Paper.pdf


A Macro View of Shadow Banking: Levered Betas and Wholesale Funding in the Context of Secular Stagnation

Zoltan Pozsar

January 31, 2015


Shadow Bank Monitoring

Tobias Adrian, Adam B. Ashcraft, and Nicola Cetorelli

September 2013

Click to access 771630980.pdf


Shedding Light on Shadow Banking

Artak Harutyunyan, Alexander Massara, Giovanni Ugazio, Goran Amidzic, and Richard Walton


Click to access 05supbanc.pdf


Shadow banks and macroeconomic instability

Roland Meeks,Benjamin D Nelson and Piergiorgio Alessandri


Click to access wp487.pdf


Do contractionary monetary policy shocks expand shadow banking?

Benjamin Nelson, Gabor Pinter and Konstantinos Theodoridis

January 2015

Click to access wp521.pdf


Shadow Banking: Policy Challenges for Central Banks

Thorvald Grung Moe


Click to access 786536284.pdf


Sizing Up Repo 

Arvind Krishnamurthy Stefan Nagel

Dmitry Orlov

June 2012

Click to access KrishnaNagelOrlov12.pdf


Securitization, Shadow Banking, and Bank Regulation

Julian Kolm

September, 2015


Click to access Securitization_and_Bank_Capital_Regulation.pdf


Monetary Policy, Financial Conditions, and Financial Stability

Tobias Adrian and Nellie Liang

September 2014

Click to access 796909652.pdf


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


David Luttrell

Harvey Rosenblum

Jackson Thies


Click to access staff1203.pdf


Runs on Money Market Mutual Funds

Lawrence Schmidt† Allan Timmermann Russ Wermers§

June 20, 2014

Click to access Schmidt_Timmermann_Wermers.pdf



The Rise and Fall of the Shadow Banking System


Zoltan Pozsar


The Macroeconomics of Shadow Banking
Alan Moreira  Alexi Savov

April 29, 2016


Repo Runs

Antoine Martin David Skeie Ernst-Ludwig von Thadden

Click to access sr444.pdf


Repo Runs: Evidence from the Tri-Party Repo Market

Adam Copeland, Antoine Martin, and Michael Walker

August 2014

Click to access sr506.pdf


Who Ran on Repo?

Gary Gorton, Andrew Metrick

October 4, 2012

Click to access whorancompleteoctober4.pdf


Shadow Banking and the Funding of the Nonfinancial Sector


Joshua Gallin 2013

Click to access 201350pap.pdf


The Evolution of a Financial Crisis: Panic in the Asset-Backed Commercial Paper Market
Daniel Covitz, Nellie Liang, and Gustavo Suarez

August 18, 2009


Click to access 200936pap.pdf


The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market
Daniel M. Covitz Nellie Liang Gustavo Suarez

April 5, 2012


The Economics of Structured Finance

Joshua Coval, Jakub Jurek, and Erik Stafford



Click to access 09-060.pdf


The Rise of the Originate- to-Distribute Model and the Role of Banks in Financial Intermediation

Vitaly M. Bord and João A. C. Santos


Click to access 1207bord.pdf



Adam B. Ashcraft

Til Schuermann

March 4, 2008

Click to access 0743.pdf


Repo and Securities Lending

Tobias Adrian, Brian Begalle, Adam Copeland, and Antoine Martin

February 2013

Click to access sr529.pdf