Financial Intermediation and 

Monetary Policy

Tobias Adrian and Hyun Song Shin
Federal Reserve Bank of New York and Princeton University

Central Bank of Argentina
Money and Banking Conference
August 31‐ September 1, 2009, Buenos Aires

The views expressed in this presentation are those of the authors and do not necessarily represent
those of the Federal Reserve Bank of New York or the Federal Reserve System.
 References
• Adrian and Shin (2007) “Liquidity and Leverage,” Journal of Financial Intermediation, 
forthcoming

• Adrian and Shin (2008) “ Financial Intermediaries, Financial Stability, and Monetary 
Policy,” Jackson Hole Economic Symposium Proceedings, Federal Reserve Bank of 
Kansas City.

• Adrian and Shin (2009) “Money, Liquidity, and Monetary Policy,” American Economic 
Review: Papers & Proceedings 2009, 99:2.

• Adrian and Shin (2009) “Prices and Quantities in the Monetary Policy Transmission 
Mechanism,” International Journal of Central Banking, forthcoming.

• Adrian and Shin (2009) “The Changing Nature of Financial Intermediation and the 
Financial Crisis of 2007 – 2009,” Annual Reviews, forthcoming.

• Adrian and Shin (2009) “Financial Intermediaries and Monetary Economics,” 
Handbook of Monetary Economics, forthcoming. 2
 Stylized Financial System

ultimate ultimate
borrowers claim holders

Households
Households
Pension funds

Insurance
companies
Non-
financial
firms
direct credit
govt Rest of world
Treasury & municipal bonds,
corporate bonds, equities

3
 Stylized Financial System

ultimate ultimate
borrowers claim holders

equity
Banking Households
Households
intermediated (intermediary) Pension funds
credit
sector debt claims
mortgages Insurance
companies
corporate deposits
Non- credit… financial paper
financial MBS, ABS…
firms
direct credit
govt Rest of world
Treasury & municipal bonds,
corporate bonds, equities

4
 $ Trillion

0
1
2
3
4
5
6
1980Q1 7
1982Q1
1984Q1
1986Q1
Bank-based
Market-based

1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
0
1
2
3
4
5
6
7
Holding of Home Mortgages
Market Based and Bank Based 

5
Growth of  Assets of Four Sectors 
(March 1954 = 1) (Log scale)

1000

Non-financial
corporate
100
Households

Security Broker
Dealers
10
1980Q1 Commercial
Banks

1
1954Q1

1957Q1

1960Q1

1963Q1

1966Q1

1969Q1

1972Q1

1975Q1

1978Q1

1981Q1

1984Q1

1987Q1

1990Q1

1993Q1

1996Q1

1999Q1

2002Q1

2005Q1

2008Q1
6
 Broker‐Dealer Asset Growth 
and Primary Dealer Repo Growth
Annual % Annual %
44 44
Security Broker-Dealer Asset Growth

22 22

0 0

Primary Dealer Repo Growth

-22 -22

-44 -44
1990 1995 2000 2005
Source: Board of Governors of the Federal Reserve and Federal Reserve Bank of New York 7
 Shadow Bank and 
Commercial Bank Asset Growth
Annual % Annual %
40 20

30 15
Commercial Banks
(right axis)

20 10

10 5

Shadow Banks
(left axis)
0 0
1985 1990 1995 2000 2005
Note: Shadow banks are ABS issuers, finance companies, and funding corporations.
8
Source: Board of Governors of the Federal Reserve
 Shadow Bank Asset Growth and 
Commercial Paper Growth
Annual % Annual %
30 40
Shadow Bank Asset Growth
(left axis)
20
20

10
0
0
Commercial Paper Outstanding Growth
(right axis)
-20
-10

-20 -40
1990 1995 2000 2005
Source: Board of Governors of the Federal Reserve 9
Short Term Funding: CP, Repo, M1
Billions of Dollars Billions of Dollars
3000 3000

Reverse Repo
2500 2500

2000 2000
Commercial Paper
1500 1500

M1
1000 1000

500 500
1995 2000 2005
Source: Federal Reserve Board 10
 Repos plus CP, and M2
Billions of Dollars Billions of Dollars
9000 9000

7000 Money Stock M2 7000

5000 5000

3000 3000

Primary Dealer Repo plus

Commercial Paper Outstanding
1000 1000
1985 1990 1995 2000 2005
Source: Board of Governors of the Federal Reserve and Federal Reserve Bank of New York 11
 Credit Demand
• Demand for credit
– Investment by households (esp. housing) and non‐
financial corporates
– Durable goods consumption (consumer loans)
– Demand for financing by central and local governments

• Demand for credit depends on: 
– Interest rates and spreads
– Household and Firm Net worth
– Fiscal policy
12
Yield Curve (Credit Demand)

13
 Credit Supply
• Delegation to financial intermediaries 

• Credit supply determined by forces shaping 
financial intermediary balance sheets

• Monetary policy works through intermediation
– Profitability of intermediation through yield curve
– Lender of last resort operations determine availability of 
funding for intermediaries

14
 Repo Haircuts
Haircuts Spreads
May‐07 May‐08 May‐09 May‐07 May‐08 May‐09
Corporate Debt A 5 10 20 86 235 364

Corporate Debt Baa 5 20 30 115 278 508

ABS Aaa 10 25 35 73 327 350

Corporate Debt Ba 25 30 40 177 433 833

Corporate Debt B 25 40 50 239 618 996

Corporate Debt Caa 25 100 100 396 932 1573

Note: Credit spreads are option adjusted. Haircuts are for triparty repos.
Source: DTCC, Bloomberg.
15
 Haircut Curve (Credit Supply)

Source: DTCC, Bloomberg 16

 Procyclical Leverage of
Five US Investment Banks
20
Total Asset Growth (% Quarterly)
10

2008-1
2007-3
0

2007-4
-10

1998-4
-20

-20 -10 0 10 20
Leverage Growth (% Quarterly)
Adrian and Shin (2007) 17
 Primary Dealer Leverage
All Primary Dealers
Ratio Ratio
40 40
2008Q1

35 35

30 30

1987Q2 1998Q3
25 25

20 20

15 15
1986 1991 1996 2001 2006

Source: SEC 18
 Domestic US and Foreign 
Primary Dealer Leverage
Domestic Primary Dealers Foreign Banks
Ratio Ratio Ratio Ratio
26 26 65 65
1987Q2 2008Q1
1998Q3

2007Q4 55 55
22 22

45 45
18 18
35 35
1998Q3
14 14
25 25

10 10 15 15
1986 1991 1996 2001 2006 1986 1991 1996 2001 2006

Source: SEC Source: SEC

Adrian and Shin (2009, AER) 19

Biggest Damage is Done in Contractions

ultimate ultimate
borrowers claim holders

Households
Households
Pension funds
Banking
(intermediary) Insurance
companies
sector
Non-
financial
firms

govt Rest of world

20
But Seeds of Crises Are Sown in Expansions

ultimate ultimate
borrowers claim holders

Households
Households
Pension funds
Banking
(intermediary) Insurance
companies
sector
Non-
financial
firms

govt Rest of world

21
Asset Backed Securities Issuance
Three Months Sum

350
Other
300
Non-U.S. Residential
250
Mortgages
Student Loans
$ Billions

200
Credit Cards
150
Autos

100
Commercial Real
Estate
50
Home Equity
(Subprime)
0
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08

Source: JP Morgan 22
 Impulse Response of Broker‐Dealer Asset Growth 
on Housing Investment Growth

2
Housing Investment Growth

-1
0 5 Quarters 10 15

Impulse Response to Broker Dealer Asset Growth Shock

Adrian and Shin (2008, Jackson Hole) 23

 Central Bank Policy Rules
• Fed Funds Target
F(GDP, Inflation, Risk Appetite)
– Taylor rule, augmented with the risk appetite factor 

• Quantitative policy
Q(GDP, Inflation, Risk Appetite)
– Superficial resemblance to monetary aggregate targeting

• Credit Easing (TALF, CPFF, etc.)
– Form of by‐pass surgery…

24
 By‐pass Surgery
ultimate
borrowers Central
bank
Households Excess Reserves ultimate
claim holders
CPFF etc

Households
equity
Non- Banking Pension funds
financial intermediated (intermediary)
firms credit Insurance
sectorv debt claims companies

Blocked deposits
financial paper
artery MBS, ABS…

25
 Central Bank Liquidity Backstops
• Commercial banks generally have discount window (DW) access and 
S&Ls have Federal Home Loan Bank funding access.

• However, institutions such as broker‐dealers, shadow banks, money 
market funds ‐‐‐who often perform bank like maturity and liquidity 
transformation‐‐‐do not generally have DW access.

• In the past two years, new temporary Federal Reserve 13(3) lending 
facilities have been introduced by the Federal Reserve to extend 
liquidity backstops to a broader set of institutions or markets, via :
– PDCF: DW for dealers and indirectly the repo market
– CPFF: backstop to the CP market
– FX swaps: backstop to foreign central banks
26
– TALF: liquidity provision to securitization markets
Discount Window (DW) and PDCF
Discount Window and PDCF Borrowing
Billions of Dollars Billions of Dollars
150 150
PDCF

100 100

Jul 15:
50 34.46 50

DW
Jul 15:
0.0
0 0
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Source: Federal Reserve Board
27
Commercial Paper Funding Facility 
(CPFF)
CPFF and Commercial Paper Outstanding
Billions of Dollars Billions of Dollars
1900 600
Total
(left axis)

Jun 30:
1600 339.0 400

Federal Reserve Jul 17:

1300 Net Holdings 107.1 200
(right axis) FDIC
TLGP
(right axis) Jul 17:
1096.7
1000 0
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Source: Federal Reserve Board, Haver
28
 Central Bank Liquidity Swaps
Central Bank Liquidity Swaps
Billions of Dollars Billions of Dollars
600 600

400 400

200 200

Jul 15:
111.8

0 0
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Source: Federal Reserve Board, Bloomberg
29
Term Securities Lending Facility (TSLF)
TSLF Total Outstanding
Billions of Dollars Billions of Dollars
200 200

150 150
Schedule 2

100 100
Jul 16:
7.0
50 50
Schedule 1 Jun 25:
0.0
0 0
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Source: Federal Reserve Bank of New York
30
 ABS Issuance and TALF
$Bln
70 2nd axis

60 Equipment TALF

Student Loan TALF

50
Credit Card TALF

40 Auto TALF

SBA non-TALF
30
Equipment non-
TALF
20 Student Loan non-
TALF
10 Credit Card non-
TALF
Auto non-TALF
0
Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309
Source: JPMorgan 31
 Central Bank Policy Tools
• Prices
– Fed Funds Target.

• Balance Sheet Quantities
– Credit easing using CB balance sheet (outright purchases of 
Treasury, MBS, CPs etc).
– Haircut/margin policy to influence balance sheet growth of 
financial intermediaries.

• Channels of Policy
– Demand and supply of credit.
– Expectations about the future path of prices and quantities.
32