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Leverage? What Leverage? A Deep Dive into the U.S. Flow of Funds in Search of Clues to the Global Crisis

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  • Tamim Bayoumi
  • Ashok Vir Bhatia

Abstract

This paper questions the view that leverage should have forewarned us of the global financial crisis of 2007-09, pointing to several gearing indicators that were neither useful portents of the onset of the crisis nor of its ferocity. Instead it shows, first, that the use of ill-suited collateral in the secured funding operations of U.S.-based investment banks was the fatal link between the collapse of structured finance and the global malfunction of funding markets that turbocharged the downdraft; and, second, that this insight (and others) can be decrypted from the Flow of Funds Accounts of the United States.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/162.

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Length: 30
Date of creation: 01 Jun 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/162

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Keywords: Banks; Borrowing; Consumer credit; Credit expansion; Financial instruments; Financial sector; credit; collateral; bonds; shares; repo; hedge; hedge funds; financial assets; pools; deposit insurance; bond; foreign bonds; financial system; financial intermediaries; prices; municipal bonds; pension funds; financial markets; equity capital; money market mutual fund; money market; financial institutions; corporate bonds; financial market; unsecured bonds; retail investors; revenue bonds; caps; bond portfolios; counterparty; systemic risk; derivative; bond financing; bond underwriters; debt stock; financial contracts; financial regulation; purchases; equity market; hedge fund; secured lenders; bond issuance; industrial revenue bonds; bond issuers; credit unions;

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  1. Carmen M. Reinhart & M. Belen Sbrancia, 2011. "The Liquidation of Government Debt," BIS Working Papers 363, Bank for International Settlements.
  2. Adam Copeland & Antoine Martin & Michael Walker, 2010. "The tri-party repo market before the 2010 reforms," Staff Reports 477, Federal Reserve Bank of New York.
  3. Manmohan Singh & James Aitken, 2010. "The (Sizable) Role of Rehypothecation in the Shadow Banking System," IMF Working Papers 10/172, International Monetary Fund.
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