Working Paper: NBER ID: w16079
Authors: Viral V. Acharya; Philipp Schnabl
Abstract: The global imbalance explanation of the financial crisis of 2007-09 suggests that demand for riskless assets from countries with current account surpluses created fragility in countries with current account deficits, most notably, in the United States. We examine this explanation by analyzing the geography of asset-backed commercial paper (ABCP) conduits set up by large commercial banks. We show that both banks located in surplus countries and banks located in deficit countries manufactured riskless assets of $1.2 trillion by selling short-term ABCP to risk-averse investors, predominantly U.S. money market funds, and investing the proceeds primarily in long-term U.S. assets. As negative information about U.S. assets became apparent in August 2007, banks in both surplus and deficit countries experienced difficulties in rolling over ABCP and as a result suffered significant losses. We conclude that global banking flows, rather than global imbalances, determined the geography of the financial crisis.
Keywords: Global banks; Global imbalances; Asset-backed commercial paper; Financial crisis
JEL Codes: F1; F3; G21; G28; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ABCP exposure (G52) | bank performance outcomes (G21) |
| deteriorating quality of US assets (G32) | financial stability of banks (G21) |
| surplus country banks manufactured riskless assets (G21) | financial stability of banks (G21) |
| deficit country banks manufactured riskless assets (F65) | financial stability of banks (G21) |