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The (Sizable) Role of Rehypothecation in the Shadow Banking System

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  • Manmohan Singh
  • James Aitken
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    Abstract

    This paper examines the sizable role of rehypothecation in the shadow banking system. Rehypothecation is the practice that allows collateral posted by, say, a hedge fund to its prime broker to be used again as collateral by that prime broker for its own funding. In the United Kingdom, such use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets while in the United States rehypothecation is capped. Incorporating estimates for rehypothecation (and the associated re-use of collateral) in the recent crisis indicates that the collapse in non-bank funding to banks was sizable. We show that the shadow banking system was at least 50 percent bigger than documented so far. We also provide estimates from the hedge fund industry for the - churning - factor or re-use of collateral. From a policy angle, supervisors of large banks that report on a global consolidated basis may need to enhance their understanding of the off-balance sheet funding that these banks receive via rehypothecation from other jurisdictions.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/172.

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    Length: 15
    Date of creation: 01 Jul 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/172

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    Related research

    Keywords: Banking; Nonbank financial sector; Hedge funds; Shadow economy; collateral; hedge; hedge fund; financial statements; financial services; financial system; financial markets; derivative; international financial markets; derivatives market; financial sector; financial institutions; money market; money market funds; financial instruments;

    This paper has been announced in the following NEP Reports:

    References

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    1. Gary B. Gorton, 2010. "Questions and Answers about the Financial Crisis," NBER Working Papers 15787, National Bureau of Economic Research, Inc.
    2. Tobias Adrian & Michael J. Fleming, 2005. "What financing data reveal about dealer leverage," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Mar).
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    Cited by:
    1. Orestes Collazo Brañanova, 2013. "Shadow banking in Spain," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the Sixth IFC Conference on "Statistical issues and activities in a changing environment", Basel, 28-29 August 2012., volume 36, pages 89-98 Bank for International Settlements.
    2. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    3. Ghosh, Swati & Gonzalez del Mazo, Ines & İnci Ötker-Robe, 2012. "Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets?," World Bank - Economic Premise, The World Bank, issue 88, pages 1-7, September.
    4. Tamim Bayoumi & Ashok Vir Bhatia, 2012. "Leverage? What Leverage? A Deep Dive into the U.S. Flow of Funds in Search of Clues to the Global Crisis," IMF Working Papers 12/162, International Monetary Fund.
    5. Dive, Matthew & Hodge, Ronan & Jones, Catrin & Purchase, James, 2011. "Developments in the global securities lending market," Bank of England Quarterly Bulletin, Bank of England, vol. 51(3), pages 224-233.

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