Working Paper: CEPR ID: DP8769
Authors: Viral V. Acharya; Philipp Schnabl; Gustavo Suarez
Abstract: We analyze asset-backed commercial paper conduits, which experienced a shadow-banking "run" and played a central role in the early phase of the financial crisis of 2007-09. We document that commercial banks set up conduits to securitize assets worth $1.3 trillion while insuring the newly securitized assets using explicit guarantees. We show that regulatory arbitrage was the main motive behind setting up conduits: the guarantees were structured so as to reduce regulatory capital requirements, more so by banks with less capital, and while still providing recourse to bank balance sheets for outside investors. Consistent with such recourse, we find that conduits provided little risk transfer during the "run": losses from conduits remained with banks rather than outside investors and banks with more exposure to conduits had lower stock returns.
Keywords: Asset-Backed Commercial Paper; ABCP; Bank Capital; Conduits; Regulatory Arbitrage; Shadow Banking; Structured Investment Vehicle; SIV
JEL Codes: G01; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks used conduits for regulatory arbitrage (G28) | reduce economic capital ratio (G32) |
| banks with lower economic capital ratios (G21) | more likely to sponsor conduits (G24) |
| weaker guarantees (D86) | higher spreads (G19) |
| weaker guarantees (D86) | less likely to roll over maturing ABCP (G19) |
| conduits provided little risk transfer (G33) | losses remaining with banks (G21) |
| banks with more exposure to conduits (G21) | lower stock returns during the crisis (G01) |
| guarantees provided to investors (G24) | banks' obligations to repay maturing ABCP at par (G32) |
| crisis in the ABCP market (H12) | significant losses for outside investors (G33) |
| conduits with weaker guarantees (L95) | small losses for investors (G24) |