The (Sizable) Role of Rehypothecation in the Shadow Banking System
IMF Working Papers, July 1, 2010
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Bibliographic details
- Authors: Manmohan Singh, James Aitken
- Published: July 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201839.001
Overview
- Rehypothecation: practice allowing collateral posted by a customer (for example, a hedge fund) to its prime broker to be used again as collateral by that prime broker for its own funding.
- Jurisdictional difference highlighted:
- United Kingdom: use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets.
- United States: rehypothecation is capped.
- Incorporating rehypothecation and associated re-use of collateral into analysis of the recent crisis shows a sizable collapse in non-bank funding to banks.
Key findings
- The shadow banking system was at least 50 percent bigger than documented so far.
- The paper provides estimates from the hedge fund industry for the “churning” factor or re-use of collateral.
- Rehypothecation materially affected off-balance-sheet funding flows to banks across jurisdictions during the crisis.
Estimates and quantitative points
- Shadow banking system size: at least 50 percent bigger than previously documented.
- The paper draws on hedge fund industry estimates for the re-use (churning) factor of collateral (specific numeric churning factors are provided in the paper).
Analysis and implications
- Re-use of collateral through rehypothecation amplifies the scale of non-bank funding to banks and can deepen funding collapses during stress.
- Cross-jurisdictional differences in rehypothecation regimes (unlimited in the United Kingdom versus capped in the United States) create complexity for consolidated reporting and supervision.
- Off-balance-sheet rehypothecation channels can obscure the true scale of funding that large banks receive from non-bank counterparties.
Policy recommendations
- Supervisors of large banks that report on a global consolidated basis may need to enhance their understanding of off-balance-sheet funding received via rehypothecation from other jurisdictions.
- Greater attention to rehypothecation practices and the velocity (churning) of collateral is warranted for assessing systemic funding vulnerabilities in the shadow banking system.
Source: The (Sizable) Role of Rehypothecation in the Shadow Banking System, IMF Working Paper by Manmohan Singh and James Aitken (July 1, 2010).