Governor Daniel K. Tarullo At the Federal Reserve Bank of San Francisco Conference on Challenges in Global Finance: The Role of Asia, San Francisco, California, June 12, 2012 – Shadow Banking After the Financial Crisis
“The growing demand for safe and liquid assets was met largely by the shadow banking system’s creation of assets that were seemingly safe and seemingly liquid. New varieties of shadow-banking activities were created, some pre-existing types grew larger, and the shadow banking system became much more internationalized. For example, the volume of asset-backed commercial paper, or ABCP, grew enormously. Many ABCP vehicles issued short-term, highly rated liabilities and bought longer-term, highly rated securities, often mortgage-backed securities. Many of the vehicles were sponsored abroad, especially by European banks, which issued dollar-denominated ABCP in the U.S. market and bought dollar-denominated assets in the U.S. market. The overall volume of this activity was very large, although the net flows between the U.S. and Europe were not, leaving European bank sponsors of such ABCP vehicles with a huge exposure when market participants stopped believing that ABCP was risk-free.”
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