shadow banking sivs and financial crisis by rohit walimbe, ananthkumar reddy and shashank gupta
DESCRIPTION
The presentation will briefly explain the role of Shadow banking system more precisely the SIV in the Financial crisis. The presentation is prepared by Rohit Walimbe, Ananth Kumar Reddy and Shashank Gupta - Financial Engineering Students of IFMR, Chennai, IndiaTRANSCRIPT
Shadow Banking, SIVs and Financial Crisis
• Ananth Kumar Reddy
•Shashank Gupta
•Rohit Walimbe
Shadow Banking - Introduction
• What is shadow banking ?
•Financial Intermediaries
• Unregulated activities by regulated institutions
• No traditional bank deposits
Advantages and Disadvantages
• Important role in facilitating Global Credit
• High financial leverage
• Profit gets magnified during booms whereas losses magnify during downturns
Shadow vs. Traditional bank liabilities
SIV – an Introduction
•Structured Investment Vehicle
•Criticized as “ Structured Investment Garbage”
•What is an SIV and where do they come from?
•Who owns them?
•Why do they exist?
• Example – The RhineBridge
SIV – Structure
• Borrow short and lend long
•Get their funds by issuing
commercial paper
•The proceeds are used to
purchase other securities
•Off the banks’ balance
sheet
•Banks last resort to liquidity
providers
http://economistsview.typepad.com/economistsview/2007/09/the-role-of-str.html
Leading to the Nightmare
•No adequate cushion of net equity
•Sharp drop in the prices and market
liquidity of all mortgage-backed securities
•Sharp increase in the price of risk and in
spreads
•Drying-up of the issuance of all asset-
backed securities
•Contagion spread first to a wide class of
commercial paper and then to the money
and interbank markets
Leading to the Nightmare
•Prices and market liquidity of the collateral collapsed
• Refinancing by rolling over the outstanding commercial paper has
become almost impossible
•The committed banks and financial institutions have been required to
provide emergency liquidity.
•Some of the credit risk that was transferred to the market by the banking
system has re-emerged on the banks’ books, straining capital
requirements to an extent depending on the size of the commitment
relative to the assets of the bank
Regulators ….. ????
•“I made a mistake in presuming that the self-interests of organizations,
specifically banks and others, were such as that they were best capable
of protecting their own shareholders and their equity in the firms,” - Mr.
Allen Greenspan
•Reference to central banks’ financial stability reports, Bank of International
Settlements reports, papers of the Financial Stability Forum
•Indeed worried by the vulnerability of the system following a change in risk
appetite and in market liquidity conditions
•Most of their attention was addressed to hedge funds as the banks’ riskiest
counterparties
•Surprisingly, no mention of the potential problems arising from the existence of
off-balance sheet vehicles sponsored and guaranteed by the banks
Aftermath of financial crisis on Shadow banking systems
• Federal Reserve’s emergency liquidity funding helped shadow banks at time crisis but with expiry of these facilities, system is once again operating in margins.
Curing SIVs
Aftermath of financial crisis on Shadow banking systems contd..
• To get to grips with the shadow sector , the regulators
started running a twice a year survey of hedge funds to
assess the risks they pose to the broader system
• Central counterparties-particularly clearing houses are
also targets for regulation – To set new and more
demanding standards for payments, clearing and
settlement systems
Aftermath of financial crisis on Shadow banking systems contd..
• Financial Stability Board , a group of global regulators and
central bankers , set up in 2009 by the Group of 20
countries to spearhead changes to financial rule in the
wake of the crisis
• FSB aims by mid-2011 to draw up “recommendations to
strengthen the regulation and oversight of shadow banking
system”
Thank You