{
  "title": "The (Sizable) Role of Rehypothecation in the Shadow Banking System",
  "publication": "IMF Working Papers, July 1, 2010",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/the-sizable-role-of-rehypothecation-in-the-shadow-banking-system-24075",
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  "summary": "This paper examines the sizable role of rehypothecation in the shadow banking system. Rehypothecation is the practice that allows collateral posted by, say, a hedge fund to its prime broker to be used again as collateral by that prime broker for its own funding.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- 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.\n- Jurisdictional difference highlighted:\n  - United Kingdom: use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets.\n  - United States: rehypothecation is capped.\n- Incorporating rehypothecation and associated re-use of collateral into analysis of the recent crisis shows a sizable collapse in non-bank funding to banks."
    },
    {
      "heading": "Key findings",
      "content": "- The shadow banking system was at least 50 percent bigger than documented so far.\n- The paper provides estimates from the hedge fund industry for the “churning” factor or re-use of collateral.\n- Rehypothecation materially affected off-balance-sheet funding flows to banks across jurisdictions during the crisis."
    },
    {
      "heading": "Estimates and quantitative points",
      "content": "- Shadow banking system size: at least 50 percent bigger than previously documented.\n- 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)."
    },
    {
      "heading": "Analysis and implications",
      "content": "- Re-use of collateral through rehypothecation amplifies the scale of non-bank funding to banks and can deepen funding collapses during stress.\n- Cross-jurisdictional differences in rehypothecation regimes (unlimited in the United Kingdom versus capped in the United States) create complexity for consolidated reporting and supervision.\n- Off-balance-sheet rehypothecation channels can obscure the true scale of funding that large banks receive from non-bank counterparties."
    },
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      "heading": "Policy recommendations",
      "content": "- 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.\n- Greater attention to rehypothecation practices and the velocity (churning) of collateral is warranted for assessing systemic funding vulnerabilities in the shadow banking system.\n\nSource: The (Sizable) Role of Rehypothecation in the Shadow Banking System, IMF Working Paper by Manmohan Singh and James Aitken (July 1, 2010).\n\n---\n\n Content in this bundle\n\n- The\n  - The (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - The (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-sizable-role-of-rehypothecation-in-the-shadow-banking-system-24075"
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    "Authors: Manmohan Singh, James Aitken",
    "Published: July 1, 2010",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455201839.001",
    "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:",
    "Incorporating rehypothecation and associated re-use of collateral into analysis of the recent crisis shows a sizable collapse in non-bank funding to banks.",
    "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.",
    "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).",
    "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.",
    "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.",
    "**The**"
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