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

July 1, 2010

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Manmohan Singh, and James Aitken. The (Sizable) Role of Rehypothecation in the Shadow Banking System, (USA: International Monetary Fund, 2010) accessed December 21, 2024

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.

Subject: Banking, Brokers and dealers, Collateral, Commercial banks, Financial institutions, Financial markets, Financial services, Hedge funds, Shadow banking

Keywords: Bank, Bank nexus, Brokers and dealers, Collateral, Collateral Received, Commercial banks, Counterparty Risk, Europe, FSA, Global, Hedge fund assets, Hedge fund industry, Hedge funds, Pledgeable collateral, Rehypothecation, Shadow banking, Velocity or Churning of Collateral, WP

Publication Details

Pages:

15
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/172
Stock No:

WPIEA2010172
ISBN:

9781455201839
ISSN:

1018-5941

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