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Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09

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  • Viral V. Acharya
  • Philipp Schnabl

Abstract

The global imbalance explanation of the financial crisis of 2007-09 suggests that demand for riskless assets from countries with current account surpluses created fragility in countries with current account deficits, most notably, in the United States. We examine this explanation by analyzing the geography of asset-backed commercial paper (ABCP) conduits set up by large commercial banks. We show that both banks located in surplus countries and banks located in deficit countries manufactured riskless assets of $1.2 trillion by selling short-term ABCP to risk-averse investors, predominantly U.S. money market funds, and investing the proceeds primarily in long-term U.S. assets. As negative information about U.S. assets became apparent in August 2007, banks in both surplus and deficit countries experienced difficulties in rolling over ABCP and as a result suffered significant losses. We conclude that global banking flows, rather than global imbalances, determined the geography of the financial crisis.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16079.

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Date of creation: Jun 2010
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Publication status: published as “Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007-09” with Philipp Schnabl, IMF Economic Review, 58, 2010, 37-73
Handle: RePEc:nbr:nberwo:16079

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Cited by:
  1. Nicola Gennaioli, 2012. "A Model of Shadow Banking," 2012 Meeting Papers, Society for Economic Dynamics 89, Society for Economic Dynamics.
  2. Carol Bertaut & Laurie Pounder DeMarco & Steve Kamin & Ralph Tryon, 2011. "ABS inflows to the United States and the global financial crisis," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1028, Board of Governors of the Federal Reserve System (U.S.).
  3. Nicola Cetorelli & Linda Goldberg, 2011. "Liquidity management of U.S. global banks: internal capital markets in the Great Recession," Staff Reports, Federal Reserve Bank of New York 511, Federal Reserve Bank of New York.
  4. Obstfeld, Maurice, 2011. "Financial Flows, Financial Crises, and Global Imbalances," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8611, C.E.P.R. Discussion Papers.
  5. Bertaut, Carol & DeMarco, Laurie Pounder & Kamin, Steven & Tryon, Ralph, 2012. "ABS inflows to the United States and the global financial crisis," Journal of International Economics, Elsevier, Elsevier, vol. 88(2), pages 219-234.
  6. Thomas Goda & Photis Lysandrou, 2011. "The contribution of wealth concentration to the subprime crisis: a quantitative estimation," DOCUMENTOS DE TRABAJO CIEF, UNIVERSIDAD EAFIT 010718, UNIVERSIDAD EAFIT.
  7. Rajkamal Iyer & Samuel Da-Rocha-Lopes & José-Luis Peydró & Antoinette Schoar, 2013. "Interbank liquidity crunch and the firm credit crunch: Evidence from the 2007-2009 crisis," Economics Working Papers 1365, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Ozlem Akin & José Garcia Montalvo & Jaume Garcia Villar & José-Luis Peydró & Josep M. Raya, 2014. "The real estate and credit bubble: Evidence from Spain," Economics Working Papers 1430, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Kamin, Steven B. & DeMarco, Laurie Pounder, 2012. "How did a domestic housing slump turn into a global financial crisis?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(1), pages 10-41.
  10. Philip R. Lane, 2013. "Cross-Border Financial Integration in Asia and the Macro-Financial Policy Framework," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp423, IIIS.
  11. Carol Bertaut & Laurie Pounder DeMarco & Steven B. Kamin & Ralph W. Tryon, 2011. "ABS Inflows to the United States and the Global Financial Crisis," NBER Working Papers 17350, National Bureau of Economic Research, Inc.
  12. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(2), pages 297-312, August.

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