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

 
Author/Editor: Singh, Manmohan ; Aitken, James
 
Publication Date: July 01, 2010
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
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. In the United Kingdom, such use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets while in the United States rehypothecation is capped. Incorporating estimates for rehypothecation (and the associated re-use of collateral) in the recent crisis indicates that the collapse in non-bank funding to banks was sizable. We show that the shadow banking system was at least 50 percent bigger than documented so far. We also provide estimates from the hedge fund industry for the - churning - factor or re-use of collateral. From a policy angle, supervisors of large banks that report on a global consolidated basis may need to enhance their understanding of the off-balance sheet funding that these banks receive via rehypothecation from other jurisdictions.
 
Series: Working Paper No. 10/172
Subject(s): Banking | Nonbank financial sector | Hedge funds | Shadow economy | United Kingdom | United States

Author's Keyword(s): Rehypothecation | FSA | Velocity or Churning of Collateral | Counterparty Risk
 
English
Publication Date: July 01, 2010
Format: Paper
Stock No: WPIEA2010172 Pages: 15
Price:
US$18.00 (Academic Rate:
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