This paper presents preliminary fndings and is being distributed to economists

and other interested readers solely to stimulate discussion and elicit comments.
The views expressed in this paper are those of the authors and are not necessar-
ily refective of views at the Federal Reserve Bank of New York or the Federal
Reserve System. Any errors or omissions are the responsibility of the authors.
Federal Reserve Bank of New York
Staff Reports
Staff Report No. 458
July 2010
Revised February 2012
Zoltan Pozsar
Tobias Adrian
Adam Ashcraft
Hayley Boesky
Shadow Banking
REPORTS
FRBNY
Staff
Adrian, Ashcraft: Federal Reserve Bank of New York. Pozsar: International Monetary Fund.
Boesky: Bank of America Merrill Lynch. Address correspondence to Tobias Adrian
(e-mail: tobias.adrian@ny.frb.org). The views expressed in this paper are those of the authors
and do not necessarily refect the position of the Federal Reserve Bank of New York or the
Federal Reserve System.
Abstract
The rapid growth of the market-based fnancial system since the mid-1980s changed the
nature of fnancial intermediation. Within the market-based fnancial system, shadow
banks have served a critical role. Shadow banks are fnancial intermediaries that con-
duct maturity, credit, and liquidity transformation without explicit access to central bank
liquidity or public sector credit guarantees. Examples of shadow banks include fnance
companies, asset-backed commercial paper (ABCP) conduits, structured investment
vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders,
limited-purpose fnance companies (LPFCs), and the government-sponsored enterprises
(GSEs). Our paper documents the institutional features of shadow banks, discusses their
economic roles, and analyzes their relation to the traditional banking system. Our de-
scription and taxonomy of shadow bank entities and shadow bank activities are accom-
panied by shadow banking maps that schematically represent the funding fows of the
shadow banking system.
Key words: shadow banking, fnancial intermediation
Shadow Banking
Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky
Federal Reserve Bank of New York Staff Reports, no. 458
July 2010: revised February 2012
JEL classifcation: G20, G28, G01
`
The Federal Reserve Bank of New York, November, 2009
Short-Term Funding Short- to Long-Term Cash
MMDAs
Households, Businesses, Governments CDs
Equity Funding Long-Term Investments
Equity Equity
`
Equity
Short-Term Debt Instruments
Regulated Money Market Unregulated Money Market
Agency MBS Agency Discount Notes Intermediaries Intermediaries
*Conforming mortgages RRs
Other*
Liquidity Puts A1 *ARS, MMMFs
A1 CP
AAA ABCP
AA-BBB BDP
Equity RRs
*Conforming student loans 2a-7 MMMFs Other*
A1 *ARS, MMMFs, as well as A1
A1 (AAA) ABS Tranches CP MTNs and termABS CP
A1 ABCP ABCP
AAA BDP BDP
AA-BBB RRs RRs Short-Term Savings
Equity Other* Other*
*Conforming SBA loans *TOBs and VRDOs A1 *ARS, MMMFs Money Market Portfolios
CP
ABCP
BDP
RRs
Other*
A1 AAA Offshore (non-2a-7) MMMFs *ARS, MMMFs, as well as A1
AAA AA-BBB A1 MTNs and termABS CP
ABCP AA-BBB LTD MTNs CP ABCP
Equity Repo Equity Supers CNs* ABCP BDP
LTD Haircuts BDP RRs
Households Equity O/C High-Yield CLOs RRs Ultra-Short Bond Funds Other* Households and Nonprofits
(LBO Loans) Other* A1 *MMMFs
A1 *TOBs and VRDOs CP
AAA ABCP
AA-BBB BDP
2nd Lien Equity RRs
Equity O/C O/C O/C Other*
CP *FHC affiliate Consumer ABS *ARS, MMMFs, as well as A1
ABCP (Credit Card ABS) MTNs and termABS CP
BDP A1 ABCP
AAA BDP
AA-BBB RRs
Equity O/C Equity Other* Nonfinancial Corporates
O/C *ARS, MMMFs
an Banks
DW
AAA TAF
AA-BBB FX Swaps
LTD MTNs Tri-Party Repo System TSLF
Supers CNs* Federal, State TSLF
Nonfinancial Businesses Equity Tri-Party Clearing Banks* and Local Governments PDCF
CPFF
TALF
AMLF
MMIFF
ML, LLC
Equity O/C O/C an Banks ML II, LLC
*BoNY and JP Morgan Chase ML III, LLC
LSAPs
RoW
O/C Equity (Foreign Central Banks) Equity
RMBS
(1st lien, private label) MTNs Cash Reinvestment Accounts
CP A1 A1
ABCP AAA CP
BDP AA-BBB ABCP
Equity BDP RoW
Governments RRs (Sovereign Wealth Funds)
Equity O/C Subprime ABS Other* *Done by custodian banks
(2nd lien, subprime, HELOCs) Trading Book *MMMFs, MTNs, termABS and on an agent basis.
A1 TOBs and VRDOs
AAA
AA-BBB
Equity
Haircuts Cash Reinvestment Accounts *Issued to central banks
CMBS and High-Yield CLOs A1 in exchange for investibe FX
(LBO Loans) CP Long-Term Savings
A1 ABCP
AAA BDP Fixed Income Portfolios*
AA-BBB RRs MTNs
Equity Equity Other* *Done by real money accounts
*MMMFs, MTNs, termABS and on a principal basis.
TOBs and VRDOs CNs
*Bank, Shadow Bank
and Corporate Debt
Consumer ABS
(Card, Auto, Student Loan)
CP A1
AAA Cash
AA-BBB MTNs
Equity LTD Equity Portfolios*
Haircuts Equity
Equity O/C Other ABS
(Floorplan, Equipment, Fleets)
A1 AAA *Mutual Funds, ETFs, Separate Accounts
AAA AA-BBB *Bank and Corporate Debt
AA-BBB MTNs
Equity CNs*
O/C
CP Middle-Market CLOs
ABCP (Loans to SMEs) Cash
LTD AA-BBB Equity
Equity Equity Equity
*TermABS and CDO
debt and equity tranches
Public Equity
Cash
MTNs
LTD
Structured Credit Equity
Equity
*Hedge Funds and Private Equity
(only credit exposures)
Maiden Lane LLC
3/11/08 and 3/16/08, respectively
Portfolio Protection*
Equity
Households, Businesses, Governments
Households, Businesses, Governments Equity and the Rest of the World (RoW)
Equity
AA-BBB
Equity Equity
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
Commercial Bank*
Step (7): Wholesale Funding
(Shadow Bank "Depositors")
ABS Reserves
Warehouse Hedges
Long-Term Synthetic Liabilities Broker-dealer CVA desks, ABS pipeline hedges,
Counterparty Hedges Warehouse Hedges
Equity
Conceptualized, designed and created by Zoltan Pozsar (zoltan.pozsar@ny.frb.org)
Debt
Insu-
rance
TLGP
W
holesale Funding
(Term Debt Funding)
*Funded by UST's $50 billion
No
Explicit
Fees
GSEs, DoE, SBA Federal Government
Agency Debt Purchases Agency MBS Purchases
Insurance
Guarantees
Step (4): ABS Warehousing
Finance Company*
The "Synthetic" Shadow Banking System
Broker-Dealers*
Funded Synthetic CDOs*
Consumers
Finance Company*
Fannie and Freddie*
Credit Hedge Funds
(Credit-Linked Notes) Unfunded Synthetic CDOs*
Single-Name and Index
CDS Indices
Single-Name and Index
Assets Bond(s)
Sovereign CDS
Protection
Bought
Protection
Sold
Agency Debt Purchases
Proprietary trading desks, credit hedge funds, etc.
Term
Savings
Commercial Banks
AA-BBB
Synthetic Exposures*
Counterparty Risks*
Credit
Bets
Term
Savings
Hedgers*
Deposits
Bank Equity
Real Money Accounts*
Equity Portfolios
Money Market "Portfolios"
Loans
The Traditional Banking System

("O
riginate-to-Hold-to-M
aturity-and-Fund-with-Deposits")
unfunded liabilities, etc.
Loans,
ABS
and
CDOs
Unfunded
Protection
Referencing ABS and single-name CDS *Referencing single-name CDS indices, etc. *Inability to meet
Treasurys
CDS
AAA AAA AAA
[]
Equity
Loan(s)
Structured Credit and Loan
negative basis traders, real money accounts, etc.
Speculators*
Unfunded
Protection Protection
Sold
*Market Makers
Funded
Protection
"Naked"
Positions
Funded
Protection Counterparty Hedges
Hedges
Funded
Protection *Referencing corporate loan indices, etc.
*Hedging Motives
Insured
Assets
*Speculative Motives
indices, etc.
Ultimate Creditors
Bond(s) CDS
Unfunded
Protection Protection
Sold
[]
CDS Counterparty Hedges
Funded
Protection
Ultimate Borrowers
Corporate CDS CDPCs CPDOs* Short-Term Synthetic Liabilities
Warehouse Hedges
Synthetic Credit Liabilities
Private Risk Repositories
The "Synthetic" Shadow Banking System

(Derivatives-Based Risk Repositories)
Warehouse Hedges
Loans,
ABS
and
CDOs
Counterparty Hedges Warehouse Hedges Warehouse and
Counterparty Hedges
AAA
Loans,
ABS
and
CDOs
9/19/2008 10/21/2008 11/10/2008
Subprim
e ABS Reserves
ABCP RMBS
10/7/2008 11/25/2008 3/24/2008 10/11/2008 12/12/2007 12/12/2007
Tri-Party
Collatera
l
Reserves ABCP Reserves
Non-
repo MM
instrume
nts
Reserves $ FX
CP
Reserves AAA Reserves Warehou
sed ABS Reserves
CDS
on
CDOs
Reserves
CPFF TALF Maiden Lane III LLC TAF FX Swaps TSLF/PDCF
Equity Equity
Private Credit Transform
ation
(Tail Risk Absorption)
Provision of Risk Capital
Private Risk Repositories
*Unaffiliated with originators!
Credit Insurance
(Mortgage Insurers)
Credit H
edges
Premia
Credit
Insurance Premia
Credit
Insurance Premia
Credit
Insurance
(Par Puts)
Client
Funds
Credit "References"Mortgage Insurers* Monoline Insurers*
*Unaffiliated with originators! *Unaffiliated with originators!
MTNs
Equity
Tranches Mezz
ABS
Super
Senior
Credit Insurance
(AIGFP)
Credit Insurance
(AIGFP)
[]
MTNs
LTD
Loans
AAA
(A4)
*Public and Private Pension Funds,
Debt
Tranches
Pension Funds, Insurance Companies*
Structured Credit Portfolios*
Term
Savings
HG
ABS
Super
Senior
Structured
Credit
Credit Insurance
(Monolines)
A4 and AA-BBB ABS Tranches
AAA
Diversified Insurance Co.
LPFCs
Client
Funds
Long-Term Debt
Alternative Asset Managers*
Pension
Liabilities
Captive Finance Company *Capital Notes
Loans
AA-BBB REITs
BDP
MTN
*Independent conduit
Industrial Loan Company*
A1
Loans ABCP Loans
CP
LTD
The "External" Shadow Banking System

(DBDs: O
riginate-to-D
istribute M
odel | Independent Specialists: O
riginate-to-Fund M
odel)
Repos
O
ff-Balance Sheet Equity Liquidity Puts*
A2 & A3 (AAA) ABS Tranches
Public
Equity
Term
Savings ABS Agency
LTD
Structured
Credit
Long-Term nstruments (LTD)
Cash
Collateral
ABCP
Loans ABCP
MTNs Loans Private
LTD
AA-BBB
*Broker-dealer affiliate *ARSs, TOBs, VRDOs *Medium-termdebt
Independent Specialists' Credit Interm
ediation Process
Standalone Finance Company Credit Hedge Fund
Loans
Loans
*Finance company affiliate
[]
Term
Savings LTDs
Cash
Collateral
Securities Lending*
Agency Debt*
W
holesale Funding
(M
edium-Term Funding)
Securities
Lent
Loans AAA
(A2-A3)
Cash
Collateral
Loans
Long-
Term
Munis
Short-
Term
Munis
Loans Agency
Debt ABS
Industrial Loan Company* AAA
Local Governments
Loans
Brokered
Deposits
AA-BBB
Tax
Revenues
Muni
Bonds
Brokered
Deposits
Brokerage
Clients'
Cash
Balances
FX
Reserves Bonds* Mezzanine CDOs Super
Seniors
Principal Securities Lending
BBB
Supers
*Broker-dealer affiliate
Savings:
Export
Revenue
"Equity"
Tax
Revenues
State
Bonds
*Broker-dealer affiliate AA-BBB
Loans AA-BBB Repos
Equity Tax
Revenues Bonds
State Governments AAA Prime Broker
Super
Seniors Repos
Loans
*Broker-dealer affiliate
AAA
Securities
Lent AA-BBB ABS High-Grade CDOs
Asset Manager, O
ff-Balance Sheet
Securities Lending*
Supers
Private
MTNs Cash
Collateral Loans ABCP
Federal Government
Tax
Revenues
Treasury
Bonds
Credit Hedge Fund*
Broker-Dealer*
Loans Repos
MTNs
OMO
Collatera
l
Savings:
FX
Reserves
Local
Currency
Single-Seller Conduit
D
BD
s' Credit Interm
ediation Process
Medium-Term Instruments Agent Securities Lending
Loans
AA-A
Private Equity
Euro
Deposits
Portfolio Companies
Firms
ABCP
LBO
Loans
*European bank affiliated
AAA
ABCP
Arbitrage Conduit
Assets
Loans
Businesses
Reverse
Repos CRE CRE
Loans Loans
Bonds
Europe
AA-BBB
Businesses Europe
Savings:
Excess
Cash
"Equity"
Federal Reserve
Invest-
ments
C&I
Loans
[]
Euro
Deposits
Reserves
Savings:
Excess
Cash
"Equity"
W
holesale Funding
(O
vernight Funding)
Mezz
ABS
Mezz
CDO
ABS
Collateral
European Banks' Shadow Banking Activites
Cash lending
for
securities collateral
Mezz
CDO
The "Internal" Shadow Banking System

(Private O
riginate-to-D
istribute M
odel)
CP
ABCP
*FHC affiliate *ARSs, TOBs, VRDOs
Multi-Seller Conduit*
Goods
&
Services
Loans Loans AA-BBB ABCP
Loans
MTNs
Sweep Accounts
Long-
Term
Munis
Loans ABCP
Equity Liquidity Puts*
O
ff-Balance Sheet
AA-BBB
Loans
Structuring
and
Syndication
Loans Reverse
Repos* ABCP
Equity AAA Savings:
Excess
Cash
BBB
Supers
AAA
*BHC affiliate
"Equity"
ABS
$1 NAV
Shares BDPs
BDPs
Assets Loans
*FHC affiliate
ABCP Home 1st Lien
Subprime Homeowners
$1 NAV
Shares
AA-BBB Loans CP $1 NAV
Shares $1 NAV
Shares
High-Grade CDOs
AA-A
Supers *Capital Notes
$1 NAV
Shares
SIV, SIV-Lite
O
ff-Balance Sheet
Home 1st Lien Loans
Dollar
Deposits Loans
Securities
$1 NAV
Shares
Direct
Investmen Short-
Term
Savings
FH
Cs' Credit Interm
ediation Process
$1 NAV
Shares
Repos
CP
Loans
ABCP
AA-BBB
$1 NAV
Shares
(Retained Portfolios)
O
ff-Balance Sheet
Loans*
Agency
MBS
Discount
Notes Loans A1 Private
ABS
Agency
Debt
Munis ARSs
TOBs
or
VRDOs
FFELP ABS
Private
ABS
Agency
Debt
(Retained Portfolios)
CP
ABS
FH LBs Fannie and Freddie Cash "Plus" Funds
Agency
Bills
The Governm
ent-Sponsored Shadow Banking System

(Public O
riginate-to-D
istribute M
odel)
Enhanced Cash Funds
$1 NAV
Shares
Ultimate Borrowers
CMOs Direct Money Market Investors
Ultimate Creditors
Loans*
Agency
Pass-
Through
s
Agency
MBS
CMO
Tranches
Corporate Treasurers
A1
Off -Balance Sheet
ABS Intermediation
On -Balance Sheet
ABS Intermediation
The GSEs' Credit Interm
ediation Process
FHLBs
(Time-Tranched Agency MBS)
Federal Government
O
ff-Balance Sheet
Agency
MBS
Discount
Notes
MMMF
Insurance
The "Cash" Shadow Banking System
Deposit Insurance
(FDIC)
Liability Insurance
(Federal Government)
Credit Insurance
(GSEs, DoE, SBA)
Liability Insurance
(Federal Government)
Liability Insurance
(EU Government)
Insurance
Premia
Deposit
Insurance
FDIC
No
Explicit
Fees
No
Explicit
Fees
Implicit
Insurance
Federal Government
11/25/2008
Agency
MBS Reserves
Deposit Insurance
(FDIC)
Public Risk Repositories
(Tail Risk Absorption)
Public Risk Repositories
Public Credit Transform
ation
(Tail Risk Absorption)
European Sovereign and
Quasi-Sovereign States
Bank
Equity
11/25/2008
Temporary PBGC
Pension Funds
Client
Funds
Dollar
Deposits
Equity Funding
Agency
Debt Reserves
Discount Window
Loan
Collateral
Agency
Debt Reserves
Term
Savings Traditional Banks' Lending Process
Asset Managers*
Bank Treasurers
Bank
Equity Loans Bank
Equity
LGIPs
Loans
Exchange Stabilization Fund
$1 NAV
Shares
Insurance
Premia
*Asset Managers, Insurance Companies and
ABS
Implicit
Insurance
9/18/2008
MMMF Guarantee
Households, Businesses
Checking
Account
and the Rest of the World
The Traditional Banking System
CDs
Ultimate Creditors Depositors
Deposits Equity
Step (1): Loan Origination
TBA
Market
Step (3): ABS Issuance
Short-
Term
Savings
Ultimate Borrowers
Reserves
11/25/2008
No
Explicit
Fees
Implicit
Insurance
D
ebt Funding
(Short and Long-Term Deposits
Implicit
Insurance
Assets
Borrowers
Loans
Asset Manager* AAA
Loans
Checking
Accounts
W
holesale Funding
(Short-Term Funding)
AA-BBB Arbitrage Conduit
No
Explicit
Fees
Implicit
Insurance
SBA ABS
(ABS Warehouse Conduits)
Structuring
and
Syndication
Single-Seller Conduit
(Warehouse and Term)
SIV
Loans ABCP
(Warehouse and Term)
Loans
Loans
Discount
Notes
Step (2): Loan Warehousing
Agency
Debt
Equity
Step (5): ABS CDO Issuance
Loans*
*Capital Notes
O
ff-Balance Sheet
ABCP Mezzanine CDOs
O
ff-Balance Sheet
AA-BBB
Short-
Term
Munis
Loans
Brokered
Deposits AAA
and Life and P&C Insurance Companies
CDOs
Subprime, RMBS, CMBS
[]
Mezz
ABS
Hybrid Conduits
*FHC affiliated
Maiden Lane II LLC MMIFF AMLF
Trading Books
Catalogue:,
Shadow Bank Liabilities Step (6): ABS "Intermediation"
Trading Books
Repo Conduits
ABCP
O
ff-Balance Sheet
Loans
Bonds
Assets
"Prime" Homeowners
*DBDaffiliate
Loans
Single-Seller Conduit
Multi-Seller Conduit* Broker-Dealer*
Multi-Seller Conduit*
The Shadow Banking System
Loans
Bonds
("Rent-a-Conduit")
Broker Sweep Accounts
Single-Seller Conduit
ABS
and
CDO
Equity
Loans
ABS
Loans
ABS
Equity
Hybrid Conduits
ABCP
CP
1

1. Introduction
Shadow banks intermediate credit through a wide range of securitization and secured funding
techniques such as asset-backed commercial paper (ABCP), asset-backed securities (ABS),
collateralized debt obligations (CDOs) and repurchase agreements (repos). These securities are used
by specialized shadow bank intermediaries that are bound together along an intermediation chain.
We refer to the network of shadow banks in this intermediation chain as the shadow banking
system. While we believe that shadow banking is a somewhat pejorative name for such a large and
important part of the financial system, we adopt it in this paper.
Over the past decade, the shadow banking system provided sources of funding for credit by
converting opaque, risky, long-term assets into money-like, short-term liabilities. Arguably, maturity
and credit transformation in the shadow banking system contributed to the asset price appreciation
in residential and commercial real estate markets prior to the 2007-09 financial crisis. During the
financial crisis, the shadow banking system became severely strained and many parts of the system
collapsed. Credit creation through maturity, credit, and liquidity transformation can significantly
reduce the cost of credit relative to direct lending. However, credit intermediaries reliance on short-
term liabilities to fund illiquid long-term assets is an inherently fragile activity and may be prone to
runs.
1

1
There is a large literature on bank runs modeled as multiple equilibria initiated by Diamond and
Dybvig (1983). Morris and Shin (2004) provide a model of funding fragility with a unique
equilibrium in a setting with higher order beliefs. Martin, Skeie and von Thadden (2011) provide a
theory of runs in the repo market.
As the failure of credit intermediaries can have large, adverse effects on the real economy (see
Bernanke (1983) and Ashcraft (2005)), governments chose to shield them from the risks inherent in
reliance on short-term funding by granting them access to liquidity and credit put options in the
form of discount window access and deposit insurance, respectively.
2

Shadow banks conduct credit, maturity and liquidity transformation similar to traditional banks.
However, what distinguishes shadow banks from traditional banks is their lack of access to public
sources of liquidity such as the Federal Reserves discount window, or public sources of insurance
such as Federal Deposit Insurance. The emergency liquidity facilities launched by the Federal
Reserve and other government agencies guarantee schemes created during the financial crisis were
direct responses to the liquidity and capital shortfalls of shadow banks. These facilities effectively
provided a backstop to credit intermediation by the shadow banking system and to traditional banks
for their exposure to shadow banks.
In contrast to public-sector guarantees of the traditional banking system, prior to the onset of the
financial crisis of 2007-2009, the shadow banking system was presumed to be safe due to liquidity
and credit puts provided by the private sector. These puts underpinned the perceived risk-free,
highly liquid nature of most AAA-rated assets that collateralized credit repos and shadow banks
liabilities more broadly. However, once private sector put providers solvency was questioned, even
if solvency was perfectly satisfactory in some cases, the confidence that underpinned the stability of
the shadow banking system vanished. The run on the shadow banking system, which began in the
summer of 2007 and peaked following the failure of Lehman in September and October 2008, was
stabilized only after the creation of a series of official liquidity facilities and credit guarantees that
replaced private sector guarantees entirely. In the interim, large portions of the shadow banking
system were eroded.
The failure of private sector guarantees to support the shadow banking system stemmed largely
from the underestimation of asset price correlations by every relevant party: credit rating agencies,
risk managers, investors, and regulators. Specifically, they did not account for the fact that the prices
of highly rated structured securities become much more correlated in extreme environments than in
3

normal times. In a major systemic event, the price behavior of diverse assets become highly
correlated as investors and levered institutions are forced to shed assets in order to generate the
liquidity necessary to meet margin calls (see Coval, Jurek and Stafford (2009)). Mark-to-market
leverage constraints result in pressure on market-based balance sheets (see Adrian and Shin (2010a),
and Geanakoplos (2010)). The underestimation of correlation enabled financial institutions to hold
insufficient amounts of liquidity and capital against the puts that underpinned the stability of the
shadow banking system, which made these puts unduly cheap to sell. As investors also
overestimated the value of private credit and liquidity enhancement purchased through these puts,
the result was an excess supply of cheap credit.
The AAA assets and liabilities that collateralized and funded the shadow banking system were the
product of a range of securitization and secured lending techniques. Securitization-based credit
intermediation process has the potential to increase the efficiency of credit intermediation.
However, securitization-based credit intermediation also creates agency problems which do not exist
when these activities are conducted within a bank. In fact, Ashcraft and Schuermann (2007)
document seven agency problems that arise in the securitization markets. If these agency problems
are not adequately mitigated with effective mechanisms, the financial system has weaker defenses
against the supply of poorly underwritten loans and aggressively structured securities.
Overviews of the shadow banking system are provided by Pozsar (2008) and Adrian and Shin
(2009). Pozsar (2008) catalogues different types of shadow banks and describes the asset and
funding flows within the shadow banking system. Adrian and Shin (2009) focus on the role of
security brokers and dealers in the shadow banking system, and discuss implications for financial
regulation. The term shadow banking was coined by McCulley (2007). Gertler and Boyd (1993)
4

and Corrigan (2000) are early discussions of the role of commercial banks and the market based
financial system in financial intermediation.
The contribution of the current paper is to focus on institutional details of the shadow banking
system, complementing a rapidly growing literature on the systems collapse.. As such, our paper is
primarily descriptive, and focuses on funding flows in a somewhat mechanical manner. We believe
that the understanding of the plumbing of the shadow banking system is an important underpinning
of any study of systemic interlinkages within the financial system.
The remainder of the paper is organized as follows. Section 2 provides a definition of shadow
banking, and an estimate of the size of shadow banking activity. Section 3 discusses the seven steps
of the shadow credit intermediation process. Section 4 is by far the longest section of the paper,
describing the interaction of the shadow banking system with institutions such as bank holding
companies and broker dealers. Finally, section 5 concludes.

2. WHAT IS SHADOW CREDIT INTERMEDIATION?
2.1 Defining Shadow Banking
In the traditional banking system, intermediation between savers and borrowers occurs in a single
entity. Savers entrust their savings to banks in the form of deposits, which banks use to fund the
extension of loans to borrowers. Savers furthermore own the equity and debt issuance of the banks.
Relative to direct lending (that is, savers lending directly to borrowers), credit intermediation
provides savers with information and risk economies of scale by reducing the costs involved in
screening and monitoring borrowers and by facilitating investments in a more diverse loan portfolio.
5

Credit intermediation involves credit, maturity, and liquidity transformation. Credit transformation
refers to the enhancement of the credit quality of debt issued by the intermediary through the use of
priority of claims. For example, the credit quality of senior deposits is better than the credit quality
of the underlying loan portfolio due to the presence of junior equity. Maturity transformation refers
to the use of short-term deposits to fund long-term loans, which creates liquidity for the saver but
exposes the intermediary to rollover and duration risks. Liquidity transformation refers to the use of
liquid instruments to fund illiquid assets. For example, a pool of illiquid whole loans might trade at
a lower price than a liquid rated security secured by the same loan pool, as certification by a credible
rating agency would reduce information asymmetries between borrowers and savers.
Credit intermediation is frequently enhanced through the use of third-party liquidity and credit
guarantees, generally in the form of liquidity or credit put options. When these guarantees are
provided by the public sector, credit intermediation is said to be officially enhanced. For example,
credit intermediation performed by depository institutions is enhanced by credit and liquidity put
options provided through deposit insurance and access to central bank liquidity, respectively.
Exhibit 1 lays out the framework by which we analyze official enhancements.
2
1. A liability with direct official enhancement must reside on a financial institutions balance sheet,
while off-balance sheet liabilities of financial institutions are indirectly enhanced by the public
sector. Activities with direct and explicit official enhancement include on-balance sheet funding
Thus, official
enhancements to credit intermediation activities have four levels of strength and can be classified
as either direct or indirect, and either explicit or implicit.

2
The analysis of deposit insurance was formally analyzed by Merton (1977) and Merton and Bodie (1993).
6

of depository institutions; insurance policies and annuity contracts; the liabilities of most pension
funds; and debt guaranteed through public-sector lending programs.
3
2. Activities with direct and implicit official enhancement include debt issued or guaranteed by the
government sponsored enterprises, which benefit from an implicit credit put to the taxpayer.

3. Activities with indirect official enhancement generally include for example the off-balance sheet
activities of depository institutions like unfunded credit card loan commitments and lines of
credit to conduits.
4. Finally, activities with indirect and implicit official enhancement include asset management
activities such as bank-affiliated hedge funds and money market mutual funds, and securities
lending activities of custodian banks. While financial intermediary liabilities with an explicit
enhancement benefit from official sector puts, liabilities enhanced with an implicit credit put
option might not benefit from such enhancements ex post.
In addition to credit intermediation activities that are enhanced by liquidity and credit puts provided
by the public sector, there exist a wide range of credit intermediation activities which take place
without official credit enhancements. These credit intermediation activities are said to be
unenhanced. For example, the securities lending activities of insurance companies, pension funds
and certain asset managers do not benefit from access to official liquidity.
We define shadow credit intermediation to include all credit intermediation activities that are
implicitly enhanced, indirectly enhanced or unenhanced by official guarantees (points 2.), 3.) and 4.)
from above).

3
Depository institutions, including commercial banks, thrifts, credit unions, federal savings banks and
industrial loan companies, benefit from federal deposit insurance and access to official liquidity backstops
from the discount window. Insurance companies benefit from guarantees provided by state guaranty
associations. Defined benefit private pensions benefit from insurance provided by the Pension Benefit
Guaranty Corporation (PBGC), and public pensions benefit from implicit insurance provided by their state,
municipal, or federal sponsors. The Small Business Administration, Department of Education, and Federal
Housing Administration each operate programs that provide explicit credit enhancement to private lending.
7


2.2 Sizing the Shadow Banking System
Before describing the shadow intermediation process in detail, we begin by reporting a gauge of the
size of shadow banking activity. Figure 1 provides two measures of the shadow banking system, net
and gross, both computed from the Federal Reserve Boards flow of funds. The gross measure
sums all liabilities recorded in the flow of funds that relate to securitization activity (MBS, ABS, and
other GSE liabilities), as well as all short term money market transactions that are not backstopped
Exhibit 1: The Topology of Pre-Crisis Shadow Banking Activities and Shadow Bank Liabilities
Explicit Impilcit Explicit Implicit
Trust activities
Tri-party clearing
10
Asset management
Affiliate borrowing
Federal Loan Programs
(DoE, SBA and FHA credit puts)
Loan guarantees
3
Government Sponsored Enterprises
(Fannie Mae, Freddie Mac, FHLBs)
Agency debt Agency MBS
Annuity liabilities
4
Securities lending
Insurance policies
5
CDS protecion sold
Pension Funds Unfunded liabilities
6
Securities lending
MTNs
Tri-party repo
12
Prime brokerage customer balances
Liquidity puts (ABS, TOB, VRDO, ARS)
Mortgage Insurers Financial guarantees
Financial guarantees
CDS protection sold on CDOs
Asset management (GICs, SIVs, conduits)
Shadow Banks
CP
11
ABCP
13
Single-Seller Conduits
ABCP
13
Extendible ABCP
17
Extendible ABCP
18
Multi-Seller Conduits
ABCP
13
Hybrid Conduits
ABCP
13
Extendible ABCP
17
Extendible ABCP
18
TRS/Repo Conduits
ABCP
13
Securities Arbitrage Conduits
ABCP
13
Extendible ABCP
17
Extendible ABCP
18
Structured Investment Vehicles (SIVs)
ABCP
13
MTNs, capital notes
Extendible ABCP
18
ABCP
13
MTNs, capital notes
Bi-lateral repo
14
Bi-lateral repo
15
Credit Hedge Funds (Standalones) Bi-lateral repo
14
Bi-lateral repo
15
Money Market Intermediaries
(Shadow Bank "Depositors")
Money Market Mutual Funds $1 NAV
Overnight Sweep Agreements $1 NAV
Cash "Plus" Funds $1 NAV
Enhanced Cash Funds $1 NAV
Ultra-Short Bond Funds $1 NAV
Local Government Investment Pools (LGIPs) $1 NAV
Securities Lenders $1 NAV
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
Credit lines to
shadow banks
17
Insurance Companies
Diversified Broker-Dealers
(Investment Bank Holding Companies)
Monoline Insurers
Direct Public Enhancement Indirect Public Enhancement
European Banks
(Landesbanks, etc.)
Insured deposits
1
Non-deposit liabilities
2
Brokered deposits (ILCs)
7
State guarantees
8
Finance Companies (Standalones, Captives) Brokered deposits (ILCs)
7
Limited Purpose Finance Companies
CP
11
ABCP
16
Term ABS, MTNs
Extendible ABCP
18
Unenhanced Institution
Depository Institutions
(Commercial Banks, Clearing Banks, ILCs)
Credit lines to
shadow banks
9
Increasingly "Shadow" Credit Intermediation Activities
8

by deposit insurance (repos, commercial paper, and other money market mutual fund liabilities).
The net measure attempts to remove the double counting.
Figure 1: Shadow Bank Liabilities vs. Traditional Bank Liabilities, $ trillion
4


Source: Flow of Funds Accounts of the United States as of 2011:Q3 (FRB) and FRBNY.


We should point out that these measures of the shadow banking system are imperfect for several
reasons. First, the flow of funds does not cover the transactions of all shadow banking entities (see
Eichner, Kohn and Palumbo (2010) for data limitations of the flow of funds in detecting the
imbalances that built up prior to the financial crisis). Second, we are not providing a measure of the
net supply of credit of shadow banks to the real economy. In fact, the gross number is summing up
all shadow banking liabilities, irrespective of double counting. The gross number should not be

4
The chart uses data from the Flow of Funds Accounts of the United States. Traditional liabilities refer to
the Total Liabilities of Commercial Banking reported in line 19 of Table L109, which includes U.S.-chartered
commercial banks, foreign banking offices in U.S., bank holding companies, and banks in U.S.-affiliated areas.
Shadow Liabilities refer to the sum of Open Market Paper from line 1 of Table L208, Overnight Repo from
FRBNY, Net Securities Lending from line 20 of Table L130, GSE Total Liabilities from line 21 of Table
L124, GSE Total Pool Securities from line 6 of Table L125, Total Liabilities of ABS issuers from line 11 of
Table L126, and Total Shares Outstanding of Money Market Mutual Funds from line 13 of Table L121.
$0
$5
$10
$15
$20
$25
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
Shadow Liabilities
Net Shadow Liabilities
Bank Liabilities
9

interpreted as a proxy for the net supply of credit by shadow banks, but rather as the gross total of
securities relating to shadow banking activities. The net number mitigates the second problem by
netting the money market funding of ABS and MBS. However, the net measure is not a measure of
the net supply of credit relating provided by shadow banking activities for many reasons. Third,
many of the securitized assets are held on the balance sheets of traditional depository and insurance
institutions, or supported off their balance sheets through backup liquidity and credit derivative or
reinsurance contracts. The holding of shadow liabilities by institutions inside the safety net makes it
difficult to draw bright lines between the traditional and shadow credit intermediation, and
prompting us to classify the latter at the instrument and not institution level.
As illustrated in Figure 1, the gross measure of shadow bank liabilities grew to a size of nearly $22
trillion in June 2007. We also plot total traditional banking liabilities in comparison, which were
around $14 trillion in 2007.
5

The size of the shadow banking system has contracted substantially
since the peak in 2007. In comparison, total liabilities of the banking sector have continued to grow
throughout the crisis. The governmental liquidity facilities and guarantee schemes introduced since
the summer of 2007 helped ease the $5 trillion contraction in the size of the shadow banking system,
thereby protecting the broader economy from the dangers of a collapse in the supply of credit as the
financial crisis unfolded. While these programs were only temporary in nature, given the still
significant size of the shadow banking system and its inherent fragility due to exposure to runs by
wholesale funding providers, one open question is the extent to which some shadow banking
activities should have more permanent access to official backstops, and increased oversight, on a
more permanent basis.

5
Adrian and Shin (2010b) and Brunnermeier (2009) provide complementary overviews of the financial
system in light of the financial crisis.
10

3. THE SHADOW CREDIT INTERMEDIATION PROCESS
The shadow banking system is organized around securitization and wholesale funding. In the
shadow banking system, loans, leases, and mortgages are securitized and thus become tradable
instruments. Funding is also in the form of tradable instruments, such as commercial paper and
repo. Savers hold money market balances, instead of deposits with banks.
Like the traditional banking system, the shadow banking system conducts credit intermediation.
However, unlike the traditional banking system, where credit intermediation is performed under
one roofthat of a bankin the shadow banking system, it is performed through a daisy-chain of
non-bank financial intermediaries in a multi step process. These steps entail the vertical slicing of
traditional banks credit intermediation process and include (1) loan origination, (2) loan
warehousing, (3) ABS issuance, (4) ABS warehousing, (5) ABS CDO issuance, (6) ABS
intermediation and (7) wholesale funding. The shadow banking system performs these steps of
shadow credit intermediation in a strict, sequential order with each step performed by a specific type
of shadow bank and through a specific funding technique.
1. Loan origination (i.e. auto loans and leases, non-conforming mortgages, etc.) is performed by
finance companies which are funded through commercial paper (CP) and medium-term notes
(MTNs).
2. Loan warehousing is conducted by single- and multi-seller conduits and is funded through asset-
backed commercial paper (ABCP).
3. The pooling and structuring of loans into term asset-backed securities (ABS) is conducted by broker-
dealers ABS syndicate desks.
4. ABS warehousing is facilitated through trading books and is funded through repurchase
agreements (repo), total return swaps or hybrid and repo/TRS conduits.
11

5. The pooling and structuring of ABS into CDOs is also conducted by broker-dealers ABS syndicate
desks.
6. ABS intermediation is performed by limited purpose finance companies (LPFCs), structured
investment vehicles (SIVs), securities arbitrage conduits and credit hedge funds, which are
funded in a variety of ways including for example repo, ABCP, MTNs, bonds and capital notes.
7. The funding of all the above activities and entities is conducted in wholesale funding markets by
funding providers such as regulated and unregulated money market intermediaries (for example,
2(a)-7 MMMFs and enhanced cash funds, respectively) and direct money market investors (such
as securities lenders). In addition to these cash investors, which fund shadow banks through
short-term repo, CP and ABCP instruments, fixed income mutual funds, pension funds and
insurance companies also fund shadow banks by investing in their longer-term MTNs and
bonds.

The shadow credit intermediation process conducts an economic role that is analogous to the credit
intermediation process performed by banks in the traditional banking system. The shadow banking
system decomposes the simple process of deposit-funded, hold-to-maturity lending conducted by
banks into a more complex, wholesale-funded, securitization-based lending process. Through this
intermediation process, the shadow banking system transforms risky, long-term loans (subprime
Exhibit 2: The Steps, Entities and Funding Techinques Involved in Shadow Credit Intermediation - Illustrative Examples
Function Shadow Banks Shadow Banks' Funding*
Step (1) Loan Origination Finance companies CP, MTNs, bonds
Step (2) Loan Warehousing Single and multi-seller conduits ABCP
Step (3) ABS Issuance SPVs, structured by broker-dealers ABS
Step (4) ABS Warehousing Hybrid, TRS/repo conduits, broker-dealers' trading books ABCP, repo
Step (5) ABS CDO Issuance SPVs, structured by broker-dealers ABS CDOs, CDO-squareds
Step (6) ABS Intermediation LPFCs, SIVs, securities arbitrage conduits, credit hedge funds ABCP, MTN, repo
Step (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lenders, etc. $1 NAV shares (shadow bank "deposits")
*Funding types highlighted in red denote securitized funding techniques. Securitized funding techniques are not synonymous with secured funding.
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
12

mortgages, for example) into seemingly credit-risk free, short-term, money-like instruments, stable
net asset value (NAV) shares that are issued by 2(a)-7 money market mutual funds which require
daily liquidity. This crucial point is illustrated by the first and last links in Exhibit 3 depicting the
asset and funding flows of the credit intermediation process of the shadow banking system.

Importantly, not all intermediation chains involve all seven steps, and some might involve even
more steps. For example, an intermediation chain might stop at Step 2 if a pool of prime auto
loans is sold by a captive finance company to a bank-sponsored multi-seller conduit for term
warehousing purposes. In another example, ABS CDOs could be further repackaged into a
CDO^2, which would elongate the intermediation chain to include eight steps. Typically, the poorer
an underlying loan pools quality at the beginning of the chain (for example a pool of subprime
mortgages originated in California in 2006), the longer the credit intermediation chain that would be
required to polish the quality of the underlying loans to the standards of money market mutual
funds and similar funds. As a rule of thumb, the intermediation of low-quality long-term loans
(non-conforming mortgages) involved all seven or more steps, whereas the intermediation of high-
quality short- to medium-term loans (credit card and auto loans) involved usually three steps (and
rarely more). The intermediation chain always starts with origination and ends with wholesale
funding, and each shadow bank appears only once in the process.
Exhibit 3: The Shadow Credit Intermediation Process
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
ABCP, repo
"Funding Flows"
CP ABCP Repo ABCP, repo CP, repo
ABCP $1 NAV Loans Loans Loans ABS ABS ABS CDO
Maturity and Liquidity
Transformation
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Step 6 Step 7
The shadow credit intermediation process consists of distinct steps. These steps for a credit intermediation chain that depending on the type and quality of credit involved may involve as little as 3 steps and as much as 7 or more steps. The shadow
banking system conducts these steps in a strict sequential order. Each step is conducted by specific types of financial entities, which are funded by specific types of liabilities (see Table 2).
Step 1 Step 2 Step 3 Step 4 Step 5
"Asset Flows"
13

4. THE SHADOW BANKING SYSTEM
We identify the three distinct subgroups of the shadow banking system. These are: (1) the
government-sponsored shadow banking sub-system; (2) the internal shadow banking sub-system;
and (3) the external shadow banking sub-system. We also discuss the liquidity backstops that were
put in place during the financial crisis.
4.1 The Government-Sponsored Shadow Banking Sub-System
The seeds of the shadow banking system were sown nearly 80 years ago, with the creation the
government-sponsored enterprises (GSE), which are comprised of the FHLB system (1932), Fannie
Mae (1938) and Freddie Mac (1970). The GSEs have dramatically impacted the way in which banks
fund are funded and conduct credit transformation: the FHLBs were the first providers of term
warehousing of loans, and Fannie Mae and Freddie Mac were cradles of the originate-to-distribute
model of securitized credit intermediation.
Exhibit 4: The Steps, Entities and Funding Techniques Involved in the GSEs' Credit Intermediation Process

Like banks, the GSEs fund their loan and securities portfolios with a maturity mismatch. Unlike
banks, however, the GSEs are not funded using deposits, but through capital markets, where they
issue short and long-term agency debt securities. These agency debt securities are bought by money
market investors and real money investors such as fixed income mutual funds. The funding
Function Shadow Banks Shadow Banks' Funding*
Step (1) Mortgage Origination Commercial banks Deposits, CP, MTNs, bonds
Step (2) Mortgage Warehousing FHLBs Agency debt and discount notes
Step (3) ABS Issuance Fannie Mae, Freddie Mac through the TBA market Agency MBS (passthroughs)
Step (4) ABS Warehousing Broker-dealers' trading books ABCP, repo
Step (5) ABS CDO Issuance Broker-dealer agency MBS desks CMOs (resecuritizations)
Step (6) ABS Intermediation GSE retained portfolios Agency debt and discount notes
Step (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lenders $1 NAV shares (GSE "deposits")
*Funding types highlighted in red denote securitized funding techniques. Securitized funding techniques are not synonymous with secured funding.
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
14

functions performed by the GSEs on behalf of banks and the way in which GSEs are funded are the
models for wholesale funding markets (see Exhibit 4 and Appendix 1).
The GSEs have embodied four intermediation techniques:
1. Term loan warehousing provided to banks by the FHLBs.
2. Credit risk transfer and transformation through credit insurance provided by Fannie Mae and
Freddie Mac.
3. Originate-to-distribute securitization functions provided for banks by Fannie Mae and Freddie
Mac.
4. Maturity transformation conducted through the GSE retained portfolios, which operate not
unlike SIVs.
6
Over the past thirty years or so, these four techniques have became widely adopted by banks and
non-banks in their credit intermediation and funding practices. The adaptation of these techniques
fundamentally changed the bank-based, originate-to-hold credit intermediation process and gave rise
to the securitization-based, originate-to-distribute credit intermediation process.

Fannie Mae was privatized in 1968 in order to reduce government debt. Privatization removed
Fannie from the governments balance sheet, yet it continued to have a close relationship with it and
carry out certain policy mandates. Arguably, it also enjoyed an implicit government guarantee. This
was similar to the off-balance sheet private shadow banks that were backstopped through liquidity
guarantees by their sponsoring banks.

6
Not unlike SIVs, all GSE debt and guarantees are off balance sheet to the federal government. No
provisions are made for capital needs and balance sheet risks, and the GSEs are excluded from the federal
budget. Their off-balance sheet nature is the same as those of bank sponsored SIVs and securities arbitrage
conduits that had to be rescued by their sponsor banks. The GSEs are off-balance sheet shadow banks of
the federal government.
15

The government-sponsored shadow banking sub-system is not involved in loan origination, only
loan processing and funding.
7
These entities qualify as shadow banks to the extent that they are
involved in the traditional bank activities of credit, maturity, or liquidity transformation, but without
actually being chartered as banks and without having a meaningful access to a lender of last resort
and an explicit insurance of their liabilities by the federal government.
8
4.2. The Internal Shadow Banking Sub-System

The development of the GSEs activities described above has been mirrored by the evolution of a
full-fledged shadow banking system over the past 30 years. The shadow banking system emerged
from the transformation of the largest banks from low return on-equity (RoE) utilities that originate
loans and hold and fund them until maturity with deposits, to high RoE entities that originate loans
in order to warehouse and later securitize and distribute them, or retain securitized loans through
off-balance sheet asset management vehicles. In conjunction with this transformation, the nature of
banking has changed from a credit-risk intensive, deposit-funded, spread-based process, to a less
credit-risk intensive, but more market-risk intensive, wholesale funded, fee-based process.
The vertical and horizontal slicing of credit intermediation is conducted through the application of a
range of off-balance sheet securitization and asset management techniques (see Exhibit 5), which
enable FHC-affiliated banks to conduct lending with less capital than if they had retained loans on
their balance sheets. This process enhances the RoE of banks, or more precisely, the RoE of their
holding companies.


7
The GSEs are prohibited from loan origination by design. The GSEs create a secondary market for
mortgages to facilitate the funding of mortgages.
8
Note that Fannie and Freddie had some explicit backstops from the U.S. Treasury in the form of credit lines
prior to their conservatorship in 2008. However, these liquidity backstops were very small compared to the
size of their balance sheets.
16

Exhibit 5: The Steps, Entities and Funding Techniques Involved in FHCs' Credit Intermediation Process

Thus, whereas a traditional bank would conduct the origination, funding and risk management of
loans on one balance sheet (its own), an FHC (1) originates loans in its bank subsidiary, (2)
warehouses and accumulates loans in an off-balance sheet conduit that is managed by its broker-
dealer subsidiary, is funded through wholesale funding markets, and is liquidity-enhanced by the
bank, (3) securitizes loans via its broker-dealer subsidiary by transferring them from the conduit into
a bankruptcy-remote SPV, and (4) funds the safest tranches of structured credit assets in an off-
balance sheet ABS intermediary (a structured investment vehicle (SIV), for example) that is managed
from the asset management subsidiary of the holding company, is funded through wholesale funding
markets and is backstopped by the bank (see Appendix 2).
This process highlights three important aspects of the changed nature of lending in the U.S.
financial system, especially for residential and commercial mortgage credit. First, the process of
lending and the uninterrupted flow of credit to the real economy is no longer reliant on banks only,
but on a process that spanned a network of banks, broker-dealers, asset managers and shadow
banksall under the umbrella of FHCsfunded through wholesale funding and capital markets
globally. Second, a bank subsidiarys only direct involvement in an FHCs credit intermediation
process is at the loan origination level. Its indirect involvements are broader, however, as it acts as a
lender to the subsidiaries and off-balance sheet shadow banks involved in the warehousing and
Function Shadow Banks Shadow Banks' Funding*
Step (1) Loan Origination Commercial bank subsidiary Deposits, CP, MTNs, bonds
Step (2) Loan Warehousing Single/multi-seller conduits ABCP
Step (3) ABS Issuance SPVs, structured by broker-dealer subsidiary ABS
Step (4) ABS Warehousing Hybrid, TRS/repo conduits, broker-dealers' trading books ABCP, repo
Step (5) ABS CDO Issuance SPVs, structured by broker-dealer subsidiary ABS CDOs, CDO-squareds
Step (6) ABS Intermediation SIVs, internal credit hedge funds (asset management) ABCP, MTN, capital notes and repo
Step (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lending subs. $1 NAV shares (shadow bank "deposits")
*Funding types highlighted in red denote securitized funding techniques. Securitized funding techniques are not synonymous with secured funding.
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
17

processing of loans, and the distribution and funding of structured credit securities. Despite the fact
that FHCs credit intermediation process depends on at least four entities other than the bank, only
the bank subsidiary of an FHC has access to the Federal Reserve's discount window and benefits
from deposit insurance. Third, lending has become capital efficient, fee-rich, high-RoE endeavor
for originators, structurers and ABS investors. As the financial crisis of 2007-2009 shows, however,
the capital efficiency of the process is highly dependent on liquid wholesale funding and debt capital
markets globally. Paralysis in markets can thus turn banks capital efficiency to capital deficiency, with
systemic consequences.
This interpretation of the workings of FHCs is different from the one that emphasizes the benefits
of FHCs as financial supermarkets. According to that widely-held view, the diversification of the
holding companies revenues through broker-dealer and asset management activities makes the
banking business more stable, as the holding companies banks, if need be, could be supported by
net income from other operations during times of credit losses. In our interpretation, the broker-
dealer and asset management activities are not parallel, but serial and complementary activities to
FHCs banking activities.
4.3 The External Shadow Banking Sub-System
Similar to the internal shadow banking sub-system, the external shadow banking sub-system is a
global network of balance sheets, with the origination, warehousing and securitization of loans
conducted mainly from the U.S., and the funding and maturity transformation of structured credit
assets conducted from the U.S., but also from Europe and offshore financial centers. However,
unlike the internal sub-system, the external sub-system is less of a product of regulatory
arbitrage, and more a product of vertical integration and gains from specialization. The external
shadow banking sub-system is defined by (1) the credit intermediation process of diversified broker-
18

dealers; (2) the credit intermediation process of independent, non-bank specialist intermediaries; and
(3) the credit puts provided by private credit risk repositories.
4.3.1 The Credit Intermediation Process of Diversified Broker-Dealers
We refer to the standalone investment banks as they existed prior to 2008 as diversified broker-
dealers (DBD). The DBDs vertically integrate their securitization businesses (from origination to
funding), lending platforms, and asset management units. The credit intermediation process of
DBDs is similar to those of FHCs (see Exhibit 6):
Exhibit 6: The Steps, Entities and Funding Techniques Involved in DBDs' Credit Intermediation Process

The diversified broker dealers are distinguished by the fact that they do not own commercial bank
subsidiaries. Most of the major standalone investment banks did, however, own industrial loan
company (ILC) subsidiaries. Since running ones own loan warehouses (single- or multi-seller loan
conduits) requires large bank subsidiaries to fund the contingent liquidity backstops that enhance the
ABCP issued by the conduits, broker-dealers typically outsourced these warehousing functions to
FHCs with large deposit bases, or to independent multi-seller, hybrid or TRS conduits. At the end
of their intermediation chains, DBDs dont operate securities arbitrage conduits or SIVs. Instead,
internal credit hedge funds, trading books and repo conduits act as funding vehicles. Partly due to
this reason, the DBDs intermediation process tends to be more reliant on repo funding than that of
FHCs, which relied on CP, ABCP, MTNs and repos. The types of credit intermediated by
diversified broker-dealers is similar to FHCs, with the exception that they do not originate credit
Function Shadow Banks Shadow Banks' Funding*
Step (1) Loan Origination Finance company subsidiary CP, MTNs, bonds
Step (2) Loan Warehousing Independent multi-seller conduits ABCP
Step (3) ABS Issuance SPVs, structured by broker-dealer subsidiary ABS
Step (4) ABS Warehousing Hybrid, TRS/repo conduits, broker-dealers' trading books ABCP, repo
Step (5) ABS CDO Issuance SPVs, structured by broker-dealer subsidiary ABS CDOs, CDO-squareds
Step (6) ABS Intermediation Internal credit hedge funds, proprietary trading desks Repo
Step (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lending subs. $1 NAV shares (shadow bank "deposits")
*Funding types highlighted in red denote securitized funding techniques. Securitized funding techniques are not synonymous with secured funding.
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
19

card loans (which are the near-exclusive domain of FHCs) and are less prominent lenders of
conforming mortgages, FFELP student loans and SBA loans.
Prior to the creation of the Primary Dealer Credit Facility, the only DBD subsidiaries that were
backstopped by the Federal Reserve or the FDIC were the ILC and FSB subsidiaries. The
numerous other subsidiaries that are involved in the origination, processing and movement of loans
and structured credits as they pass through DBDs credit intermediation process do not have direct
access to these public enhancements.
It should be noted that the credit intermediation processes described here are the simplest and
shortest forms of the intermediation chains that run through FHCs and DBDs. In practice, these
processes are often elongated by additional steps involved in the warehousing, processing and
distribution of unsold ABS into ABS CDOs (also see Appendix 3).
4.3.2 The Independent Specialists-Based Credit Intermediation Process
The credit intermediation process that runs through a network of independent, specialist non-bank
financial intermediaries perform the very same credit intermediation functions as those performed
by traditional banks or the credit intermediation processes of FHCs and DBDs. The independent
specialists-based intermediation process includes the following types of entities: stand-alone and
captive finance companies on the loan origination side
9

9
Captive finance companies are finance companies that are owned by non-financial corporations. Captive
finance companies are typically affiliated with manufacturing companies, but might also be affiliated with
homebuilders as well, for example. Captive finance companies are used to provide vendor financing services
for their manufacturing parents wares. Some captive finance companies are unique in that they are do not
finance solely the sale of their parents wares, but instead a wide-range of loan types, many of which are hard,
or impossible for banks to be active in. Captive finance companies often benefit from the highly-rated nature
of their parents, which gives them access to unsecured funding at competitive terms. Stand alone finance
companies, as the name suggests stand on their own and are not subsidiaries of any other corporate entity.
; independent multi-seller conduits on the
20

loan warehousing side; and limited purpose finance companies (LPFCs), independent SIVs and
credit hedge funds on the ABS intermediation side (see Exhibit 7).
Exhibit 7: The Steps, Entities and Funding Techniques Involved in the Independent Specialists-Based Credit Intermediation Process

There are three key differences between the independent specialists-based credit intermediation
process and those of FHCs and DBDs. First, and foremost, on the origination side, these three
processes intermediate different types of credit. The FHC and DBD-based processes originate
some combination of both conforming and non-conforming mortgages, as well as commercial
mortgages, leveraged loans and credit card loans. In contrast, the independent specialists-based
process tends to specialize in the origination of auto and equipment loans and leases, middle-market
loans, franchise loans and more esoteric loans in which traditional banks and FHCs becomes less
and less active over time. The obvious exceptions to this are standalone non-conforming mortgage
finance companies, which are largely extinct since the crisis.
10

10
It is fair to say that the independent specialists-based credit intermediation process became collateral
damage in the collapse of standalone subprime mortgage originators and subprime securitizations.
The independent specialists-based
credit intermediation process is based on an originate-to-fund (again, with the exception of the
now extinct standalone mortgage finance companies) as opposed to the mostly originate-to-
distribute model of the government-sponsored shadow banking sub-system and FHCs and DBDs
credit intermediation process. While the GSE, FHC and DBD-based credit intermediation
Function Shadow Banks Shadow Banks' Funding*
Step (1) Loan Origination Standalone and captive finance companies CP, MTNs and bonds
Step (2) Loan Warehousing FHC-sponsored and independent multi-seller conduits ABCP
Step (3) ABS Issuance SPVs, structured by broker-dealers ABS
Step (4) ABS Warehousing - ABCP, repo
Step (5) ABS CDO Issuance - ABS CDOs, CDO-squareds
Step (6) ABS Intermediation LPFCs, independent SIVs, independent credit hedge funds ABCP, MTN, capital notes and repo
Step (7) Wholesale Funding 2(a)-7 MMMFs, enhanced cash funds, securities lenders. $1 NAV shares (shadow bank "deposits")
*Funding types highlighted in red denote securitized funding techniques. Securitized funding techniques are not synonymous with secured funding.
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
21

processes are heavily dependent on liquid capital markets for their ability to fund, securitize and
distribute their loans, independent specialists seamless functioning is also exposed to DBDs and
FHCs abilities to perform their functions as gatekeepers to capital markets and lenders of last
resort, respectively. This in turn represents an extra layer of fragility in the structure of the
independent specialists-based credit intermediation process, as failure by FHCs and DBDs to
perform these functions in times of systemic stress ran the risk of paralyzing and disabling the
independent specialists-based intermediation process (see Rajan (2005)). Indeed, this fragility
became apparent during the financial crisis of 2007-2009 as the independent specialists-based
process broke down, and with it the flow of corresponding types of credit to the real economy.
Appendix 4 shows the relative extent to which specialist loan originators (captive and independent
finance companies) relied on FHCs and DBDs as their ABS underwriters and gatekeepers to capital
markets.
4.3.3 Private Credit Risk Repositories
While the credit intermediation process of independent specialists is highly reliant on FHCs and
DBDs, FHCs and DBDs in turn rely heavily on private credit risk repositories to perform originate-
to-distribute securitizations (see Appendix 5). Private risk repositories specialize in providing credit
transformation services in the shadow banking system, and include mortgage insurers, monoline
insurers, certain subsidiaries of large, diversified insurance companies, credit hedge funds and credit
derivative product companies. These entities, as investors in the junior equity and mezzanine
tranches of loan pools, all provide risk capital to the shadow banking system, thereby supporting
credit extension to the real economy.
Different credit risk repositories correspond to specific stages of the shadow credit intermediation
process. As such, mortgage insurers specialize in insuring, or wrapping whole mortgage loans;
22

monoline insurers specialize in wrapping ABS tranches (or the loans backing a specific ABS
tranches); and large, diversified insurance companies, credit hedge funds and credit derivative
product companies specialize in taking on the risks of ABS CDO tranches through CDS.
11
Effectively, the various forms of credit put options provided by private risk repositories absorbs tail
risk from loan pools, turning the enhanced securities into credit-risk free securities (at least from
investors perception prior to the crisis). This in turn means that any liability that issued against
these assets is perceived to be credit-risk free as well, as if it is FDIC-insured.
There
are also overlaps, with some monolines wrapping both ABS and ABS CDOs, for example.
The perceived, credit-risk free nature of traditional banks and shadow banks liabilities stem from
two very different sources. In the case of traditional banks insured liabilities (deposits), the credit
quality is driven by the counterpartythe U.S. taxpayer. As a result, insured depositors invest less
effort into examining a banks creditworthiness before depositing money than if they are uninsured.
In the case of shadow banks liabilities (repo or ABCP, for example), perceived credit quality is
driven by the credit-risk free nature of collateral that backs shadow bank liabilities, as it is often
enhanced by private credit risk repositories.
The credit puts provided by private credit risk repositories are alternatives to the credit
transformation performed by (1) the credit risk-based calibration of advance rates and attachment
points on loan pools backing top-rated ABCP and ABS tranches, respectively; (2) the credit risk-
based calibration of haircuts on collateral backing repo transactions; (3) the capital notes supporting
LPFCs and SIVs portfolios of assets, and (4) the pooling and re-packaging of non-AAA rated term

11
CDS were also used for hedging warehouse and counterparty exposures. For example a broker-dealer with
a large exposure to subprime MBS that it warehoused for an ABS CDO deal in the making could purchase
CDS protection on its MBS warehouse. In turn, the broker-dealer could also purchase protection (a
counterparty hedge) from a credit hedge fund or CDPC on the counterparty providing the CDS protection
on subprime MBS.
23

ABS into ABS CDOs. The credit puts of private credit risk repositories are also similar in function
to the wraps provided by Fannie Mae and Freddie Mac on conforming mortgage pools.
12
4.4 The Parallel Banking System
Just as
these government-sponsored, public credit risk repositories borrowed the AAA-rating of the
federal government to pools of mortgage loans (turning them into credit risk-free rate products), the
private credit risk repositories were effectively borrowing the AAA-rating of their parent.
Many internal and external shadow banks exist in a form that is only possible due to special
circumstances in the run up to the financial crisissome economic in nature and some due to
regulatory and risk management failures. However, there are also many examples of shadow banks
that exist due to gains from specialization and comparative advantage over traditional banks. Such
shadow banks were not driven by regulatory arbitrage, but by gains from specialization as a
parallel banking system. Most (but not all) of these entities can be found in the external shadow
banking sub-system.
These entities include non-bank finance companies, which can be more efficient than traditional
banks through specialization and economies of scale in the origination, servicing, structuring, trading
and funding of loans to both bankable and non-bankable credits.
13

12
Credit wraps come in different forms and guarantee the timely payment of principal and interest on an
underlying debt obligation.
For example, finance companies
have traditionally served subprime credit card or auto loan customers, or low-rated corporate credits
like the commercial airlines, which are not served by banks. Furthermore, some ABS intermediaries
could fund highly-rated structured credit assets at lower cost and lower levels of leverage than banks
with high RoE targets.
13
Carey, Post, and Sharpe (1998) document the specialization of finance companies among riskier borrowers.

24

Over the last thirty years, market forces have pushed a number of activities outside of banks and
into the parallel banking system. It remains an open question whether or not the parallel banking
system will ever be stable through credit cycles in the absence of official credit and liquidity puts. If
the answer is no, then there are questions about whether or not such puts and the associated
prudential controls should be extended to parallel banks, or, alternatively, whether or not parallel
banking activity should be severely restricted. For a spectrum of shadow banking activities by type,
see Appendix 6.
4.5 BACKSTOPPING THE SHADOW BANKING SYSTEM
The Federal Reserves 13(3) emergency lending facilities that followed in the wake of Lehmans
bankruptcy amount to a backstop of all the functional steps involved in the shadow credit
intermediation process. The facilities introduced during the crisis were an explicit recognition of the
need to channel emergency funds into internal, external and government-sponsored shadow
banking sub-systems (for a pre- and post-crisis backstop of shadow banks see Appendixes 7 and 8).
As such, the Commercial Paper Funding Facility (CPFF) was a backstop of the CP and ABCP
issuance of loan originators and loan warehouses, respectively (steps 1 and 2 of the shadow credit
intermediation process); the Term Asset-Backed Loan Facility (TALF) is a backstop of ABS issuance
(step 3); Maiden Lane LLC was a backstop of Bear Stearns ABS warehouse, while the Term
Securities Lending Facility (TSLF) was a means to improve the average quality of broker-dealers
securities warehouses through swapping ABS for Treasuries (step 4); Maiden Lane III LLC was a
backstop of AIG-Financial Products credit puts on ABS CDOs (step 5); and the Term Auction
Facility (TAF) and the FX swaps with foreign central banks were meant to facilitate the
25

onboarding and on-balance sheet, dollar funding of the ABS portfolios of formerly off-balance
sheet ABS intermediariesmainly SIVs and securities arbitrage conduits (step 6).
1415
Finally, the Primary Dealer Credit Facility (PDCF) was a backstop of the tri-party repo system
through which MMMFs and other funds fund broker-dealers in wholesale funding markets
overnight, and the AMLF and the Money Market Investor Funding Facility (MMIFF
)
served as
liquidity backstops of regulated and unregulated money market intermediaries, respectively (step 7).

Similarly, the FDICs Temporary Liquidity Guarantee Program that covered (1) various bank and
non-bank financial institutions senior unsecured debt, (2) corporations non-interest bearing deposit
transaction accounts, regardless of dollar amount, and (3) the U.S. Department of Treasurys
temporary guarantee program of retail and institutional money market mutual funds were also
backstops to the funding of the shadow banking system, and are all modern-day equivalents of
deposit insurance. Upon the full rollout of the liquidity facilities, large-scale asset purchases and
guarantee schemes, the shadow banking system was fully embraced by official credit and liquidity
puts, and became fully backstopped, just like the traditional banking system. As a result, the run on
it was fully checked.

14
The CPFF is documented in detail by Adrian, Marchioni, Kimbrough (2009); TSLF is described by
Fleming, Hrung, Keane (2009); TALF is described by Campbell, Covitz, Nelson, Pence (2011) and Ashcraft,
Malz, Pozsar (2010); the PDCF is in Adrian, Burke, and McAndrews (2009); TAF is in Armentier, Krieger,
McAndrews (2008).
15
The TAF facility was only available to bank or FHC-affiliated ABS intermediaries. Standalone ABS
intermediaries (LPFCs and independently managed SIVs and securities arbitrage conduits) and the ABS
intermediaries of pension funds, insurance companies and monoline insurers did not benefit from
intermediated access to the discount window.
26

5. CONCLUSIONS
We document the specialized financial institutions of the shadow banking system, and argue that
these specialized financial intermediaries played a quantitatively important role in the run-up to the
financial crisis. Shadow credit intermediation includes three broad types of activities, differentiated
by their strength of official enhancement: implicitly-enhanced, indirectly-enhanced, and unenhanced.
The shadow banking system has three sub-systems which intermediate different types of credit, in
fundamentally different ways. The government-sponsored shadow banking sub-system refers to
credit intermediation activities funded through the sale of Agency debt and MBS, which mainly
includes conforming residential and commercial mortgages. The internal shadow banking sub-
system refers to the credit intermediation process of a global network of banks, finance companies,
broker-dealers and asset managers and their on- and off-balance sheet activitiesall under the
umbrella of financial holding companies. Finally, the external shadow banking sub-system refers
to the credit intermediation process of diversified broker-dealers (DBDs), and a global network of
independent, non-bank financial specialists that include captive and standalone finance companies,
limited purpose finance companies and asset managers. While much of the current and future
reform effort is focused remediating the excesses of the recent credit bubble, we note that increased
capital and liquidity standards for depository institutions and insurance companies are likely to
increase the returns to shadow banking activity.For example, as pointed out in Pozsar (2011), the
reform effort has done little to address tendency for large institutional cash pools to form outside
the banking system. Thus, we expect shadow banking to be a significant part of the financial system,
though almost certainly in a different form, for the foreseeable future.


27

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29

Appendix 1: The Government-Sponsored Shadow Banking System
CP
etc. CNs*
CP
MTNs MTNs MTNs
Equity Equity Equity
Equity Equity Equity
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
"Asset Flows"
The shadow credit intermediation process, and the shadow banking system were to a great extent insipred by the government sponsored enterprises, namely the FHLB system, Fannie Mae and Freddie Mac. The GSEs are creations of lawmakers and are off-balance sheet "shadow banks" of the U.S. Federal
Government. The GSEs that make up the government-sponsored shadow banking system perform similar functions to term multi-seller conduits, credit risk repositories, and LPFCs and SIVs in the "private" shadow banking system. Thus, similar to multi-seller conduits, the FHLB system provides term loan
warehousing for conforming mortgages (and other loans) to member commercial banks; similar to monoline insurers, Fannie Mae and Freddie Mac provide guarantees on the loans that back Agency MBS, turning them into credit risk-free rate products; and similar to SIVs or LPFCs, the GSE retained portfolios
conduct maturity transformation on pools of mortgages and private-label term ABS. The credit intermediation process that goes through the government-sponsored shadow banking sub-system starts with commercial banks that originate conforming mortgages. These are either (1) funded with the FHLBs through
maturity, or (2) are sold in the "TBA" market in order to be packaged into Agency MBS. As the loans pass through the TBA process, Fannie or Freddie provide guarantees on the loan pools, assuming the credit risk out of them. Some of the Agency MBS might end up being packaged into collateralized mortgage
obligations (CMOs) which time-tranche the underlying cash-flows of mortgage pools. The short-dated tranches of CMOs are sold to 2(a)-7 MMMFs and other funds. Similarly, the GSE retained portfolios are funded through a mix of short-dated Agency discount notes (the GSE equivalent of private CP and ABCP)
and Agency debt (the GSE equivalents of private MTNs and bonds) that are also sold to MMMFs and real money accounts, respectively.
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Single-Seller Conduit SIVs 2(a)-7 MMMFs
(Loan Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")
HELs
...flow ...stock!
ABCP
"AuM" (2A) Underwriting
(TBA Market)
"IG"
ABS
CP
$1 NAV
ABCP
AAA
ABCDO
MTNs
Repos
Confor-
ming
Loans
Confor-
ming
Loans
(3A) Distribution CMOs
(Time Tranching)
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u
b
s
id
ia
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ie
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Commercial Bank Broker-Dealer Broker-Dealer
(Loan Origination) (ABS Structuring/Syndication) (CDO Structuring & Syndication)
Client
Funds Other
Activities
Other
Activities
Flow ...flow ...flow
HELs
Confor-
ming
Loans
Deposits
Under-
writing Repos
Under-
writing Repos
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)

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ABS
FHLB
System
Fannie Mae
Freddie Mac
The GSE's
Retained Portfolios
Confor-
ming
Loans
Agency
Discount
Notes
and Debt
Agency
Discount
Notes
and Debt
Agency
Discount
Notes
and Debt
Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Maturity and Liquidity
Transformation
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding
Loans Loans Loans ABS ABS ABS CDO ABCP ABCP $1 NAV
"Funding Flows"
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
30

Appendix 2: The Credit Intermediation Process of Bank Holding Companies







Appendix 3: The Credit Intermediation Process of Diversified Broker-Dealers




CP
etc. CNs*
CP
MTNs MTNs MTNs
Equity Equity Equity
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
F
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s
ABCP
(Shadow Bank "Deposits")
$1 NAV
2(a)-7 MMMFs
ABCP
Repos
Wholesale Funding
Client
Funds
$1 NAV
ABCP Loans Loans Loans ABS
Maturity and Liquidity
Transformation
HELs ABCP
"Mezz"
HEL
ABS
Tranches
Hybrid, Repo/TRS Conduits SIVs
(Loan Warehousing) (ABS Warehousing) (ABS Intermediation)
MTNs
"IG"
ABS
AAA
ABCDO
HELs
Deposits
...stock!
ABCP
CP
Step 2 Step 3 Step 4 Step 5 Step 6
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
ABS
Credit Transformation
(Blending)
ABS CDO
Under-
writing
Commercial Bank Broker-Dealer Broker-Dealer
Flow ...flow
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
"Funding Flows"
...flow
Under-
writing
(ABS Structuring/Syndication) (Loan Origination)
"AuM"
(CDO Structuring & Syndication)
Repos Repos
Other
Activities
Other
Activities
The credit intermediation process of Financial Holding Companies flows through a chain of subsidiaries and off-balance sheet vehicles (shadow banks), and is funded in capital markets. This intermediation chain enhances the efficiency of bank equity for various reasons. If markets freeze and the FHC's subsidiaries
have to "onboard" their normally off-balance sheet assets and activities, capital efficiency can quickly become capital deficiency, with systemic consequences. The process described here is an originate-to-distribute model of non-conforming mortgages, where the originating banks and the broker-dealers that slice
and dice mortgages into ABS and ABS CDOS do not retain any first loss pieces along the intermediation chain.
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/
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s
Single-Seller Conduit
Step 7 Step 1
Credit, Maturity and
Liquidity Transformation
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation
Credit, Maturity and
Liquidity Transformation
...flow
"Asset Flows"
...flow
CP
Equity etc.
MTNs MTNs
Equity Equity Equity
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
Industrial Loan Company
Client
Funds Other
Activities
Other
Activities
Flow ...flow ...flow
Under-
writing Repos
Under-
writing Repos
Finance Company Broker-Dealer Broker-Dealer
(Loan Origination) (ABS Structuring/Syndication) (CDO Structuring & Syndication)
HELs
CP
MTNs
(Loan Warehousing) (ABS Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")
HELs
Brokered
Deposits
...flow ...flow ...stock!
"Mezz"
HEL
ABS
Tranches
Repos
"IG"
ABS
$1 NAV
Brokered
Deposits AAA
ABCDO
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S
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t






















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a
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"

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e
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/
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c
t
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ie
s
Repos
Repos
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l
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"
Trading Books Credit Hedge Funds 2(a)-7 MMMFs
"AuM"
H
o
ld
in
g

C
o
m
p
a
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y





















S
u
b
s
id
ia
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s
The credit intermediation process of Diversified Broker-Dealers (DBD) is similar to that of FHC's (see Figure XX), with only a few differences. First, DBDs originate loans out of finance company subsidiaries, not commercial bank subsidiaries. Second, DBDs warehouse loans not in conduits, but in industrial loan
company subsidiaries; alternatively, DBDs can outsource loan warehousing to an multi-seller conduit run by an FHC. Third, ABS warehousing is also not conducted from conduits, but from trading books. Finally, ABS intermediation is not conducted through SIVs, but through internal credit hedge funds. On a
funding level, DBD's intermediation proceess is more reliant on brokered deposits and repo, compared to the FHC process, which is more reliant on branch deposits, CP and ABCP.
Step 1 Step 2 Step 3 Step 4 Step 5 Step 6
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding
ABCP $1 NAV
"Asset Flows"
Step 7
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Maturity and Liquidity
Transformation
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
"Funding Flows"
Loans Loans Loans ABS ABS ABS CDO ABCP
31

Appendix 4: The Independent Specialists-Based Credit Intermediation Process Specialists Reliance on FHCs and DBDs as Gatekeepers to Capital Markets

CP
etc. CNs*
CP
MTNs MTNs
Equity Equity
Captive or Standalone
CP
etc. Equity etc. CNs*
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
(2A) Distribution
(
2
B
)

D
i
s
t
r
i
b
u
t
i
o
n
The indepenent specialists-based credit intermediation process consists of entities like independent and captive finance companies on the loan origination side; limited purpose finance companies (LPFCs) and standalone SIVs and credit hedge funds on the ABS intermediation side; and LGIPS and non-bank affiliated
MMMFs on the funding side. The independent specialists-based credit intermediation process is highly dependent on FHCs and DBDs as gatekeepers to capital markets and as underwriters of their securitization-based credit intermediation process. For example, starting from the bottom left balance sheet ("Captive or
Standalone Finance Companies") and going to the right along the red line, finance companies rely on (1) FHC-affiliated multi-seller conduits for loan warehousing, (2) broker-dealers for the structuring and syndication of the ABS that funds their retained loans, which by definition are originate-to-fund securitizations
(in contrast to FHCs' and DBDs' originate-to-distribute securitizations); (3) broker-dealers for the distribution of ABS to LPFCs (path 3A) and alternatively to SIVs (path 3B) that are affiliated with the FHC that owns the broker-dealer. Additionally, along the green line that begins from the balance sheet labeled
"LPFCs", LPFCs rely on broker-dealers to underwrite their CP (as well as MTNs and capital notes) and (2) distribute them to FHC/DBD-affiliated MMMFs and LGIPS (paths 2A and 2B, respectively), as well as real money accounts, which are not depicted. Also note that the below figure do not depict the entire
FHC process from Figure XX, only those parts of it that are relevant to the credit intermediation process of independent specialists.
(
2
)

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t
i
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g
(3B) Distribution
(3A) Distribution
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-
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"
Finance Company LPFCs LGIPs
Client
Funds Other
Activities
Flow ...flow
(
1
)

W
a
r
e
h
o
u
s
i
n
g
(
1
)

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S
u
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ie
s
Commercial Bank
MTNs
Repos
Flow stock!
(Shadow Bank "Deposits")
Auto
Loans
CP
"IG"
ABS
CP
$1 NAV
ABCP
"Niche"
Loans
MTNs MTNs
(Loan Origination) (ABS Intermediation)
(Loan Origination) (ABS Structuring/Syndication)
HELs
Deposits
Under-
writing Repos
"AuM"
MTNs
(
4
)

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"
Multi-Seller Conduit SIVs 2(a)-7 MMMFs
(Loan Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")
ABCP
"IG"
ABS
Broker-Dealer
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CP
$1 NAV
ABCP
AAA
ABCDO
Repos
...flow ...stock!
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding
"Asset Flows"
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Maturity and Liquidity
Transformation
Step 7 Step 1 Step 2 Step 3 Step 4 Step 5 Step 6
Loans Loans Loans ABS ABS ABS CDO ABCP ABCP $1 NAV
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
"Funding Flows"
HELs
Auto
Loans
32

Appendix 5: The Independent Specialists-Based Credit Intermediation Process FHCs and DBDs Reliance on Independent Specialists

CP
etc. CNs*
CP
MTNs MTNs MTNs
Equity Equity Equity
CP
ABCP
Repos
MTNs
Equity Equity Equity etc. CNs* ABS
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
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"IG"
ABS
MTNs
CP
MTNs
stock!
LPFCs
(ABS Intermediation)
Securities Lenders
$1 NAV
(Shadow Bank "Deposits")
Mortgage Insurers* Monoline Insurers* Diversified Insurance Cos.*
*AAA, guaranteed! *AAA, guaranteed! *AAA, guaranteed!
Tail
Risks
Tail
Risks
Tail
Risks
Un-
Funded
Funded Funded
Un-
Funded
Funded
Un-
Funded
(Credit Transformation) (Credit Transformation) (Credit Transformation)
(
1
)

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(
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)

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S
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s
Commercial Bank Broker-Dealer Broker-Dealer
(Loan Origination) (ABS Structuring/Syndication) (CDO Structuring & Syndication)
HELs
Client
Funds Other
Activities
Other
Activities
Flow ...flow ...flow
Deposits
Under-
writing Repos
Under-
writing Repos
"AuM"
$1 NAV
ABCP
AAA
ABCDO
MTNs
Repos
The "internal" and "external" shadow banking sub-systems are symbiotic. Not only is the independent specialists-based credit intermediation process dependent on FHCs and DBDs as warehouse providers and gatekeepers to capital markets, but FHCs and DBDs also relied on members of the "external" shadow
banking system for funding and other functions. As such, independent specialists like LPFCs and securities lenders, for example, are instrumental in funding commercial banks and broker-dealers by buying their term debt. Furthermore, entities called private risk repositories were turning loan pools into AAA-rated,
informationally insensitive securities, which in turn served as collateral in secured funding transactions. An example of such a transaction would be a repo collateralized by monoline-wrapped AAA-rated subprime RMBS, where a broker-dealer pledges the RMBS collateral for an overnight cash loan from a 2(a)-7
MMMF. Credit risk repositories were present in both originate-to-distribute and originate-to-fund securitization chains, and each type of risk repository corresponded to specific stages of the shadow credit intermediation process. As such, mortgage insurers wrapped unsecuritized mortgage pools, monoline
insurers wrapped ABS (on either the loan pool or the tranche side of deals) while entities like AIG-Financial Products (as well as credit hedge funds, and German Landesbanks' SIVs and conduits (famously IKB's Rhineland by investing in the infamous ABACUS 2007-AC1 deal)) were selling CDS on ABS CDOs.
Credit risk repositories made the originate-to-distribute process seem riskless and essentially played the role of private-sector versions of the FDIC in the system.
O
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"
Single-Seller Conduit Hybrid, Repo/TRS Conduits SIVs 2(a)-7 MMMFs
(Loan Warehousing) (ABS Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")
HELs
...flow ...flow ...stock!
ABCP
(
3
)

T
a
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l

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k

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b
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p
t
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)

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(
2
)

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(
3
)

D
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s
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b
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t
i
o
n
ABCP
"IG"
ABS
CP "Mezz"
HEL
ABS
Tranches
"Asset Flows"
"Funding Flows"
Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Maturity and Liquidity
Transformation
ABCP $1 NAV
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
Loans Loans Loans ABS ABS ABS CDO ABCP
33

Appendix 6: The Spectrum of Shadow Banks within a Spectrum of Shadow Credit Intermediation

CP CP
MTNs ABCP
RRs
A1
Equity Equity Equity CNs etc.
O/C O/C
CP CP
MTNs ABCP
RRs
MTNs MTNs A1
Equity Equity* CNs Bonds CNs etc.
O/C O/C
CP
ABCP
RRs
A1
Equity Equity Haircut Equity MTNs
O/C O/C
ABCP
RRs
AAA A2-A3
AA-BBB
Equity Equity Haircut Equity Haircut
O/C
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
Home
Equity
Loans
(DBD Sponsored)
2(a)-7 MMMFs
(FHC Sponsored)
2(a)-7 MMMFs
(Independent)
Enhanced Cash Fund
(Independent)
Securities Lender
(Insurance Co. Sponsored)
SIVs
(FHC Sponsored)
Securities Arbitrage Conduit
(Landesbank Sponsored)
Credit Hedge Fund
"Static" ABS CDO
SIV-Lite*
(Maturity Matched)
"Revolving" ABS CDO
(Maturity Mismatched ABS CDO)
(Independent)
Repo/TRS Conduit
(FHC Sponsored)
Multi-Seller Conduit
(Independent)
Single-Seller Conduit
(Independent)
Banks' Trading Books
(...)
(Revolving Structures)
Wrapped Static Pools
(Amortizing Structures)
ABCP
*Seller's interest
BBB
Tranche
in AAA
"Wrap"
AAA
to
BBB
Tranches
DBDs Trading Books
ABCP Repo ABCP, repo CP, repo
Hybrid Conduit
AAA
to
BBB
Tranches
ABCP
AAA
to
BBB
Tranches
Bonds
(FHC Sponsored)
Credit
Card
Loans
ABCP
"Asset Flows"
Step 1 Step 2 Step 3 Step 4
Loans Loans Loans ABS ABS
Step 5 Step 6 Step 7
Maturity and Liquidity
Transformation
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance ABS Intermediation Wholesale Funding
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
ABS CDO ABCP $1 NAV
ABCP, repo
ABS
LPFCs
(Independent)
Standalone Finance Co.
"Funding Flows"
(Amortizing Structures) (Maturity Matched)
Captive Finance Co.
(Investment Grade Parent)
Single-Seller Conduit
Multi-Seller Conduit
Static Pools
Master Trusts
ABCP
MTNs
CP
Repos
Repos
Reverse
Repos
Loans
and
ABS
Loans
and
ABS
Loans
and
ABS
BBB
ABS
Tranches
(static)
ABCP
ABS
Standalone Finance Co.
ABCP
ABCP
Various
Loans
Various
Loans
Auto
Loans
Credit
Card
Loans
Subprime
Auto
Loans
(Monoline Lender)
(Diversified Lender)
("Junk" Parent)
Captive Finance Co.
ABCP
ABS
ABS
Super
Seniors
Collateral
Unfunded
CDS
Protection
BBB
ABS
Tranches
(dynamic)
BBB
ABS
Tranches
(static)
*Market value structures
AAA
to
BBB
Tranches
ABCP
AAA
to
BBB
Tranches
Home
Equity
Loans
"HEL" RMBS
Bonds
Home
Equity
Loans
SLN
(Finance Company Sponsored)
Synthetic ABS CDO
No Equity!
Personal
and
Business
Loans
Personal
and
Business
Loans
Personal
and
Business
Loans
Shadow banks are best thought along a spectrum. Each of the seven steps involved in the shadow credit intermediation process were performed by many different types of shadow banks, with varying asset mixes, funding strategies, amounts of capital
and degrees of leverage. The list of balance sheets below are an illustrative example of this. Thus, the shadow credit intermediation process was supported by various forms of equity of various degrees of strength (each denoted with a red cell): as such,
equity came in the form of common equity, overcollateralization (O/C), haircuts, equity tranches and capital notes. Wholesale funding providers (money market mutual funds, securities lenders) were the only actors involved in the shadow credit
intermediation process without any form of capital supporting their activities. Having numerous types of shadow banks under each functional step of the shadow credit intermediation process means that each funcional step can be performed many
different ways. Depending on the asset mix and funding strategy employed, different shadow banks performing the same functions in the system conducted different amounts of credit, maturiy and liquidity transformation. Shadow banks are listed
vertically, top-down, in increasing order of riskiness.
ABS
CDOs
ABS
CDOs
ABCP
ABS
ABS
CDOs
Repos
$1 NAVs
$1 NAVs
$1 NAVs
$1 NAVs
*Banks, finance cos., sovereigns
*Banks, finance cos., sovereigns
No Equity!
MTNs
No Equity!
No Equity!
ABCP
ABS
Bonds*
I
n
c
r
e
a
s
i
n
g
l
y
r
i
s
k
y
a
c
t
i
v
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t
i
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s
d
u
e

t
o
g
r
e
a
t
e
r
a
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s
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f
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r
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d
i
a
n
d

m
a
t
u
r
i
t
y

t
r
a
n
s
f
o
r
m
a
t
i
o
n
c
o
n
d
u
c
t
e
d
34

Appendix 7: The Pre-Crisis Backstop of the Shadow Credit Intermediation Process The Case of FHCs

Equity Equity Equity Equity Equity
CP
etc. CNs*
CP
MTNs MTNs MTNs
Equity Equity Equity
Equity Equity Equity Equity Equity Equity
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
"Asset Flows"
Repos
Holding Company
(Contingent Equity Call)
Subsi-
diaries
Bonds
"IG"
ABS
Step 6 Step 7
ABCP $1 NAV
"Funding Flows"
Maturity and Liquidity
Transformation
ABS Intermediation Wholesale Funding
Prior to the financial crisis, the credit intermediation process of the shadow banking system was privately enhanced. In this figure, we examine the enhancements to a typical FHC's credit intermediation process. Of the seven steps involved in the shadow credit intermediation process, only the first step (loan origination)
is officially enhanced as it is conducted from a commercial bank. The commercial bank's activities are backstoped by credit and liquidity puts provided by the FDIC and the Federal Reserve through deposit insurance and discount window lending, respectively. The remaining six steps in an FHCs credit intermediation
were privately enhanced, however. Consortiums of commercial banks were providing liquidity puts through contractual credit lines to conduits and SIVs (loan and ABS warehouses, and ABS intermediaries, respectively) and the tri-party clearing banks (JPMorgan Chase and BoNY) were providing intra-day credit to
broker-dealers and daytime unwinds of overnight repos to MMMFs that fund them. Private credit risk repositories were making risky assets safe by "wrapping" them with credit puts. The loans, ABS, and CDOs wrapped by mortgage insurers, monoline insurers and AIG-FP, respectively, circulated in the system as
credit-risk free assets that were used for collateral for funding via ABCP and repo. When the quality of these credit puts came into question, the value of collateral fell, ABCP could not be rolled, repo haircuts rose and the private liquidity puts were triggered. To provide the funding that has been agreed to via the
liquidity puts, the funding providers (commercial banks) had to tap the unsecured interbank market, where the flood of bids for funding sent Libor spreads skyward.
Diversified Insurance Cos.
Deposit
Insurance
Premium
Reserves
Premium
Reserves
Premium
Reserves
Premium
Reserves
Loan
Insurance
Bond
Insuance
Synthetic
CDOs
Monoline Insurers FDIC
(Official Credit Put) (Private Credit Put) (Private Credit Put) (Private Credit Put)
Mortgage Insurers
Step 1 Step 2 Step 3 Step 4 Step 5
F
H
C
's
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it
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t
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-
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is
t
r
ib
u
t
e
"
Single-Seller Conduit Hybrid, Repo/TRS Conduits SIVs 2(a)-7 MMMFs
(Loan Warehousing) (ABS Warehousing) (ABS Intermediation) (Shadow Bank "Deposits")
HELs
H
o
ld
in
g
C
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s
...stock!
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s
/
A
c
tiv
itie
s
CP
$1 NAV
ABCP
AAA
ABCDO
MTNs
"AuM" HELs
Federal Reserve
(Official LoLR) (Private LoLR) (Private LoLR) (Private LoLR) (Private LoLR) (Private LoLR)
Commercial Banks
Discount
Window
Loans
Other
Assets
Credit
Lines
Intra-Day
Credit
Other
Assets
Credit
Lines
Other
Assets
Reserves
Other
Assets
ABCP
"Mezz"
HEL
ABS
Tranches
ABCP
Credit
Lines
Other
Assets
Inter-
Bank
Loans
Inter-
Bank
Loans
Inter-
Bank
Loans
Inter-
Bank
Loans
Inter-
Bank
Loans
Intra-Day
Credit
Commercial Banks Tri-Party Clearing Banks Commercial Banks Tri-Party Clearing Banks
L
iq
u
id
it
y
P
u
t
Broker-Dealer Broker-Dealer
(ABS Structuring/Syndication) (CDO Structuring & Syndication)
Other
Assets
Client
Funds Other
Activities
Other
Activities
...flow ...flow
L
iq
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id
it
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P
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iq
u
id
it
y
P
u
t
L
iq
u
id
it
y
P
u
t
...flow ...flow
Deposits
Under-
writing Repos
Under-
writing Repos
Flow
Commercial Bank
(Loan Origination)
C
r
e
d
it
P
u
t
C
r
e
d
it
P
u
t
C
r
e
d
it
P
u
t
C
r
e
d
it
P
u
t
E
q
u
it
y
C
a
ll
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
Loans Loans Loans ABS ABS ABS CDO ABCP
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance
Official Backstops Private Backstops
35

Appendix 8: The Post-Crisis Backstop of the Shadow Banking System

Equity Equity Equity Equity
Equity
CP
etc. CNs*
Equity
CP
MTNs MTNs MTNs
Equity Equity Equity
Equity
Equity Equity Equity Equity Equity Equity
Source: Shadow Banking (Pozsar, Adrian, Ashcraft, Boesky (2010))
Once private sector credit and liquidity put providers' ability to make good on their "promised" puts came into question, a run began on the shadow banking system. Central banks generally ignored the impairment of such important pillars of the shadow banking system as mortgage insurers or monoline insurers. Once the crisis gathered momentum, however,
central banks became more engaged. The series of 13(3) liquidity facilities implemented by the Federal Reserve amd the guarantee schemes of other government agencies essentially amount to a 360 backstop of the shadow banking system. The 13(3) facilities can be interpreted as functional backstops of the shadow credit intermediation process. Thus, CPFF is a
backstop of loan origination and warehousing; TALF is a backstop of ABS issuance; TSLF and Maiden Lane, LLC are backstops of the system's securities warehouses (broadly speaking); Maiden Lane III, LLC is a backstop of the credit puts sold by AIG-FP on ABS CDOs; TAF and FX swaps are backstops of and facilitated the orderly "on-boarding" of
formerly off-balance sheet ABS intermediaries (many of them run by European banks who found it hard to swap FX for dollars); and finally, on the funding side, PDCF is a backstop of the tri-party repo system (a "platofrm" where MMMFs (and other funds) fund broker-dealers and large hedge-funds) and the AMLF, MMIFF and Maiden Lane II, LLC are
backstops of various forms of regulated and undregulated money market intermediaries. Furthermore, the Treasury Department's Temporary Guarantee Program of MMMFs was an additional form of backstop for money market intermediaries. This program, together with the FDIC's TLGP can be considered moder-day equivalents of deposit insurance. Only
a few types of entities were not backstopped by the crisis, and some attempts to fix problems might have exacerbated the crisis. Examples include not backstopping the monolines early on in the crisis (this might have tamed the destructiveness of deleveraging) and the failed M-LEC which ultimately led to a demarcation line between bank-affiliated and standalone
ABS intermediaries (such as LPFCs or credit hedge funds) as recipients and non-recipients of official liquidity. These entities failed too early on in the crisis to benefit from the liquidity facilities rolled out in the wake of the bankruptcy of Lehman Brothers, and their demise may well have accelerated and deepened the crisis, while also necessitating the creation of
TALF to offset the shrinkage in balance sheet capacity for ABS from their demise.
Credit, Maturity and
Liquidity Transformation
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Credit Transformation
(Blending)
Credit, Maturity and
Liquidity Transformation
Maturity and Liquidity
Transformation
Loan Originaton Loan Warehousing ABS Issuance ABS Warehousing ABS CDO Issuance
"Asset Flows"
Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7
ABS Intermediation Wholesale Funding
C
r
e
d
it
P
u
t
C
r
e
d
it
P
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t
C
r
e
d
it
P
u
t
C
r
e
d
it
P
u
t
(FDIC) (Private Credit Put) (Private Credit Put) (FRBNY) (Department of Treasury)
Debt
Insurance
Premium
Reserves
Premium
Reserves
Premium
Reserves
Mortgage Insurers Monoline Insurers TLGP Maiden Lane III, LLC TGPMMMF
Single-Seller Conduit Hybrid, Repo/TRS Conduits SIVs 2(a)-7 MMMFs
(Loan Warehousing) (ABS Warehousing) (ABS Intermediation)
Loan
Insurance
Premium
Reserves
Bond
Insuance
$1 NAV
Puts
Reserves ABS
CDO
C
r
e
d
it
P
u
t
MTNs
Repos
...flow ...flow ...stock!
HELs ABCP
"Mezz"
HEL
ABS
Tranches
ABCP
"IG"
ABS
CP
ABCP
AAA
ABCDO
Under-
writing Repos
"AuM"
Commercial Bank Broker-Dealer Broker-Dealer
(Loan Origination) (ABS Structuring/Syndication) (CDO Structuring & Syndication)
HELs
Deposits
Under-
writing
L
iq
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id
it
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P
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L
iq
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id
it
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P
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L
iq
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id
it
y
P
u
t
CPFF
Flow ...flow ...flow
Reserves Reserves
Discount
Window
Loans
Reserves
ABCP
Reserves Reserves
Other
Assets
CP
Federal Reserve
New
Isssue
AAA
ABS
Existing
ABS
"On-
boarded"
US$
Assets
(Official LoLR) (FRBNY) (FRBNY)
Reserves
Reserves
AMLF
Maiden Lane II, LLC
(FRBNY)
MMIFF
(FRBNY)
Reserves
(FRBNY)
Money
Market
Instru-
ments
AIG's
Reinvest-
ment
Portfolio
ABCP
CP
L
iq
u
id
it
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P
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s
Reserves
Client
Funds Other
Activities
Other
Activities
H
o
ld
in
g
C
o
m
p
a
n
y

S
u
b
s
id
ia
r
ie
s
(Shadow Bank "Deposits")
$1 NAV
O
f
f
-
B
a
la
n
c
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S
h
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t
"
S
h
a
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ia
t
io
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P
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s
s

"
O
r
ig
in
a
t
e
-
t
o
-
D
is
t
r
ib
u
t
e
"
(FRBNY) (FRBNY) (FRBNY)
L
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P
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L
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id
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P
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L
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id
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y
P
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t
PDCF TAF and FX Swaps TSLF and Maiden Lane, LLC TALF
Tri-Party
Collateral
Repos
Loans Loans Loans ABS ABS ABS CDO ABCP ABCP $1 NAV
"Funding Flows"
CP ABCP Repo ABCP, repo CP, repo ABCP, repo
Official Backstops Official Backstops