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

  • Manmohan Singh
  • James Aitken
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    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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    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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    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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