Before the crisis, a parallel banking system grew to roughly $20 trillion — larger than traditional banking — by slicing the humble bank loan into a seven-step assembly line of specialist intermediaries, and by funding risky, long-term loans with money-like, seemingly riskless paper. This is an interactive rebuild of the New York Fed’s famous wall map of that system: every box and flow explained in the words of the report it accompanies.
Source: Pozsar, Z., Adrian, T., Ashcraft, A., Boesky, H. (2010): Shadow Banking, Federal Reserve Bank of New York Staff Report No. 458, July 2010 — newyorkfed.org/research/staff_reports/sr458. The map itself was conceptualized, designed and created by Zoltan Pozsar (November 2009) and shipped with the report as a 36″ × 48″ poster. Page numbers in the pop-ups refer to the printed pages of the July 2010 report.
How to read the map
Every institution is drawn the way the poster draws it: a mini balance sheet with assets on the left and liabilities & equity on the right. What an entity holds and what it owes is the whole story — shadow banking is a chain of balance sheets funding each other.
Asset flows run left to right: loans are originated, warehoused, packaged into ABS, repackaged into CDOs, and parked with intermediaries. Funding flows run right to left: savers’ cash buys the paper each step issues. Ultimate borrowers sit on the far left, ultimate creditors on the far right.
Hover any box, band, step label or flow for what it is, what it holds, and how it was backstopped — click to pin the explanation, Esc to release.Tap any box, band, step label or flow for what it is, what it holds and how it was backstopped; the map pans and zooms. The red chips along the bottom are the Federal Reserve’s crisis facilities — each sits under the step of the chain it backstopped.
The shadow banking system “decomposes the simple process of deposit-funded, hold-to-maturity lending conducted by banks into a more complex, wholesale-funded, securitization-based lending process” (p. 13). The steps run in strict sequence, each performed by a specific type of shadow bank and funded by a specific technique (pp. 11–12):
Finance companies — standalone, captive, or bank- and broker-dealer-affiliated — make the loans, leases and mortgages.
funded by CP, MTNs, bonds
Single- and multi-seller conduits accumulate loans until there is enough for a securitization.
funded by ABCP
Broker-dealers’ ABS syndicate desks pool and structure the loans into rated term asset-backed securities via bankruptcy-remote SPVs.
funded by term ABS (A1 · AAA · AA–BBB · equity tranches)
Trading books and hybrid or TRS/repo conduits hold ABS through the accumulation phase before the CDO take-out.
funded by repo, ABCP, total return swaps
The same syndicate desks repackage unsold, mostly junior ABS into high-grade and mezzanine ABS CDOs — and CDOs of CDOs (CDO², CDO³).
funded by CDO tranches, CDO-squareds
LPFCs, SIVs, securities arbitrage conduits and credit hedge funds hold the structured paper and perform the system’s massive maturity transformation.
funded by ABCP, MTNs, capital notes, repo
Money market mutual funds, enhanced cash funds, securities lenders and other cash pools buy the paper — the shadow banks’ “depositors”.
funded by $1 NAV shares — shadow bank “deposits”
Not every chain uses all seven steps: high-quality, short-term loans (credit card, auto) needed three or four; “the poorer an underlying loan pool’s quality at the beginning of the chain … the longer the credit intermediation chain” required to polish it to money-market standards. A chain always starts with origination and ends with wholesale funding (p. 14).
Shadow banks are “financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees” (abstract). The system did what banks do — but nobody stood behind it. Its perceived safety rested on private credit and liquidity puts: bank backup lines behind ABCP, insurer wraps behind ABS and CDOs, clearing-bank unwinds behind repo. “Once private sector put providers’ solvency was questioned … confidence in the liquidity and credit puts that underpinned the stability of the shadow banking system vanished, triggering a run” (p. 2).
The three colored bands are the three sub-systems (pp. 20–40): the government-sponsored sub-system (the GSEs — the original originate-to-distribute machine), the “internal” sub-system (banks’ own off-balance-sheet shadow banks under FHC umbrellas, plus European banks hungry for AAA paper), and the “external” sub-system (broker-dealers and independent specialists operating wholly outside the safety net). The bottom band is the “synthetic” system, where the same credit risk is written again in derivatives.
And the red chips are the punchline: between December 2007 and November 2008 the Federal Reserve, Treasury and FDIC built “a 360º backstop of the functional steps involved in the shadow credit intermediation process” (p. 61) — a facility for nearly every box on this map. “Ultimately, a wholesale substitution of private liquidity and credit puts with official liquidity and credit puts became necessary to stop the run, but not before large portions of the shadow banking system were already gone” (p. 2).