The Sizable Role of Rehypothecation in the Shadow Banking System

16 Pages Posted: 2 Sep 2010

See all articles by Manmohan Singh

Manmohan Singh

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2, 2010

Abstract

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.

Keywords: Rehypothecation, FSA, Velocity or Churning of Collateral, Counterparty Risk

JEL Classification: G21, G28, F33, K22, G18, G15

Suggested Citation

Singh, Manmohan, The Sizable Role of Rehypothecation in the Shadow Banking System (September 2, 2010). Available at SSRN: https://ssrn.com/abstract=1670740 or http://dx.doi.org/10.2139/ssrn.1670740

Manmohan Singh (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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