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LinkedInMy apologies for an extremely wonky post.
Rather than try to build a coherent narrative that explains how money moved through the US financial system during last fall’s credit crisis, I want to highlight a few of the points in today’s flow of funds datathat jumped out at me.
Here is what caught my eye:
1) Total foreign purchases of Treasuries in 2008 exceeded the (estimated) 2008 current account deficit.
Think a current account deficit of $672.5b for all of 08 (and less than $144.6b in q4) v Treasury purchases of $755.2b in 2008 (and $273.5b in q4). Saying such inflows financed the current account is arguably a stretch, as they could just as easily have financed private capital outflows from the US. At least in normal times. 2008 though is a bit different, as
2) Other capital flows collapsed
Foreign investors bought $32b of US corporate bonds in 2008 after buying $425b in 2007 (and $541b in 06); foreign investors bought $20.5b of US corporate equities in 2008 after buying $175.5b in 2007,* and sold $240.6 of Agencies in 2008 after buying $278.2b in 2007.
The US data suggests that almost all the 2007 purchases came from central banks while almost all the 2008 sales came from private investors. Call me skeptical. I suspect that some central banks outsourced the management of at least some of their Agency portfolio to private fund managers and told their managers to reduce their risk in 2008, and thus central banks may be behind some of the “private” sales. Just a guess though.
Large foreign sales of US Agencies were largely offset by a big fall in US demand for foreign assets. Americans only bought $3 billion of foreign equities in 2008 (with purchases in the first half of 08 turning to sales in the second half) and Americans sold $92 billion of foreign bonds. Americans bought $170b of foreign bonds in 2007 (and $228b in 2006). The swing in US demand for the world’s bonds consequently was nearly as large as the swing in foreign demand for US Agencies. US sales of foreign ares are one of the sources of the dollar’s rally … as all the sales came in q3 and q4 2008.
* I rather suspect that China accounted for all (net) purchases in 2008, but I cannot prove this … but SAFE clearly was a significant buyer in the first half of 08 and doesn’t look to have sold in the second half of 08.
3) Money market funds were among those buying the Agencies that foreigners were selling …
Money market funds holdings of Agencies rose by $542.4b over the course of 2008 (buying over $300b in q4 alone). They didn’t lose confidence in the implicit guarantee of the US government. The also added nearly $400 billion to their Treasury portfolio ($150b in q4).
Conversely, money market funds “corporate and foreign bond portfolio” fell by $140b — with most of the fall coming in q3. Their securities repos also fell by about $30b, a notable change from trend. Between the end of 2007 and the end of 2004, their security repos rose by $337b, or an average annual rise of over $100b.
To put it differently, money market funds Treasury and Agency holdings went from 13% of total assets to 35% of total assets over the course of 2008. That is a flight to quality.
And, for what it is worth, the broker dealers went from holding a negative 60b of Treasuries as a financial asset to holding a positive 191b (with most of the swing coming in q4). They too were net buyers of Treasuries as they sought, I presume, to improve their liquidity position.
4) The contraction of the balance sheets of private issuers of asset-backed securities has driven the credit crunch.
Financial assets held by private issuers of asset-backed-securities fell by $441.6b in 2008. That is a big change from the $808b rise in 2006 (or even the $318b rise in 2007). The outstanding stock of commercial paper issued by “issuers of asset backed securities” fell from a peak of 903.9b in q2 2007 to $558.6b at the end of 2008. The big fall here though came back in q3 and q4 07, back at the very beginnings of the crisis.
5) The pace of expansion in the Agencies balance sheet slowed.
From q2 2007 to q2 2008, the outstanding stock of Agency paper and Agency guaranteed mortgage bonds (with Agency MBS geld by the GSEs netted out) rose by $979.3b, as the Agencies made up for the shortfall in private mortgage credit. In the last two quarters of 2008, by contrast, the net increase in outstanding Agency paper (again netting out the GSEs holdings) was more like $282b, or an annualized $564b pace …
6) Bank credit fell in q4. Commercial bank credit fell from $9726b in q3 to $9680b in q4. The banks overall balance sheet still expanded though, thanks to the $820b commercial banks now hold at the Fed. The sources of “funding for the banks changed” as well. Liabilities from “Federal funds and securities repo” fell from $837b at the end of q4 2007 to $484.4b at the end of q4 2008 — with a sharp 230b fall in q4. Large time deposits also fell in q4. Liabilities to the Fed rose from $48.6b at the end of 07 to $557.5b at the end of q4 2008 …. that could be compared to say $818b in outstanding long-term bank bonds, some of which no doubt are now insured by the FDIC. The bank holdings companies have another 636b in long-term bonds outstanding.
7) I need a bit of help to understand one change in the commercial banks balance sheet, namely the swing in interbank liabilities to foreign banks.
For the system as a whole, interbank liabilities to domestic banks went from positive 21.7b to negative 293.4b; while interbank liabilities to foreign banks went from -56.9b to positive 289.5b. All the swing came in q4. It clearly is tied to the crisis in some way, and likely is tied to the global shortage of dollar liquidity.
The flow of funds also provides data for US charted banks and for foreign bank offices in the US. US charted commercial banks seem to have increased their borrowing from foreign banks in 2008 (interbank liabilities to foreign banks increased from 478.2b to 637b). If I am reading the data correctly (a real if), that implies that US banks were drawing more heavily on the global dollar market for financing, and thus leaving less for everyone else. Foreign bank offices in the US saw their net interbank liabilities to foreign banks swing from negative 425b at the end of 2007 to negative 180b at the end of 2008. I am not quite sure though how best to interpret a fall in a negative liability, though; help here would be appreciated.
Foreign banks operating in the US also saw significant pressure on their funding in q4. Large time deposits fell by $150b, and Repos fell by about $50b. That is easy to understand. Uninsured creditors to foreign banks operating in the US weren’t in the mood to take chances.
Shrinking broker-dealer balance sheets, expanding funding company balance sheets
The balance sheet of the the broker dealers shrank by around $875b in 2008 even as their holdings of Treasuries rose, implying a big contraction in their holdings of other assets. The balance sheet of the funding companies though rose by (gulp) $1735b. Netting out cross holdings (the funding companies investment in the broker dealers), the combined assets of the broker-dealers and funding companies rose by around $325b (if I got the math and netting right) — down from a $580b increase in 2007 and a $660b increase in 2006.
Over the course of 2008, the broker-dealers and funding companies have drawn about $500b from the Fed ($491b, with most of the credit going to the funding companies). That financing supports a non-trivial fraction their $4450b or so combined balance sheet (if I am doing the netting right).
For what it is worth, a lot more corporate bonds (think “toxic assets”) are now carried on the balance sheet of the funding companies and a lot fewer are on the balance sheet of the broker-dealers.
And no doubt the main source of funding pressure on the broker-dealers came from the fall in outstanding repos — which fell from $1147b at the of 2007 to $586.3b at the end of 2008, a net fall of $561b.
No doubt though I am missing things here. Help tracing the impact of the crisis on the domestic flow of funds would be most appreciated …. I don’t know the US side of the flow of funds data quite as well as I know the balance of payments data.
The underlying Fed balance sheet data can be found here.
From the g19 release, total consumer credit increased slightly in Jan ’09 while it was decreasing till Dec ’08.
http://www.federalreserve.gov/releases/g19/Current/
People got new car loans from auto finance companies and couldnt get car loans, personal credit card loans, etc from banks.
PS: Many thanks to Mr Paul Swartz for bringing these interesting g19 tables to my attention with his earlier post during your vacation.
Fed’s annualized summary of Dec ’08 credit in their previous g19 release(dated 06FEB09)
” Consumer credit decreased at an annual rate of 3 percent in the fourth quarter. Revolving credit decreased at an annual rate of
5-1/2 percent, and nonrevolving credit decreased at an annual rate of 1-3/4 percent. In December, consumer credit decreased at an
annual rate of 3 percent.”
Summary from current 06MAR2009 release (for Jan 2009 credit data:
“Consumer credit increased at an annual rate of 3/4 percent in January 2009. Revolving credit increased at an annual rate of 1-1/4 percent,
and nonrevolving credit increased at an annual rate of 1/2 percent.”
Next, go to the L218 table (page 94 in the full release pdf) it shows that the mortgage meltdown continues. O/s Home Mortgages reduced to $11030.2 billion in December 2008 from $11,121.2 billion in November 2008.
“foreign investors bought $20.5b of US corporate equities in 2008 after buying $175.5b in 2008,*”
I think you meant $175.5b in 2007.
Michael — you are right. I edited the post accordingly.
7) interbank liabilities
So domestic banks went from being a source of dollars for foreign banks to being a borrower of dollars from foreign banks; the foreign banks in some cases getting the dollars from their central bank which got them in swap lines from the Federal Reserve. No doubt the banks had assets they planned to off-load into asset-back CP which they had to fund when that market shutdown.
I can offer a prediction that items 6) and 7) bank credit and interbank liabilities – will soon grow in leaps and bounds.
I thought that Obama might dismantle Roubini’s aggressive bearishness, but instead Obama seems to have utilized it to the advantage. Along with the more sophisticated Dr. Krugman, Roubini went around threatening the banks with nationalization. This clever move frightened the banks and scared them out of their wits. Instead of more trillions, they started demanding removal of FAS 157, the mark to market rule and got their request. So this week, the banks have turned turtle; Bank of America even tried to blame some third parties for the concerns about them by saying things aren’t as bad “as some would have us believe”.
As always, there is a great deal to learn from the Brahmin priests about dealing with all kinds of political problems. ICICI Bank was in trouble due to their borrowing something like 50% from abroad, and losing quite a lot due to exposure to Lehman.The Chairman, KV Kamath, didn’t blink an eyelid while exhorting everyone on national TV channels to “have faith in me”, given “the way we have been running the bank”. ICICI filed a complaint with the Draconian Economic Offenses Wing of the Mumbai Crime Branch. They stated that the messages floating around about the stability of the bank were malicious rumors intended “either to short the bank’s stock”, or “to completely destabilize the bank”. The Mumbai Crime Branch is the one which hunts down Islamic terrorists and shoots them down, passing it all off as “police encounters”.which analyst will dare to keep on spreading negative news about ICICI Bank in the face of this retaliation from KV Kamath?Everybody started rapidly toning down their comments and analysis. They started saying there might be “rivalry amongst banks” rather than a real problem. The RBI and the Finance Ministry explicity stated that ICICI was quite stable, and that they have more than the required regulatory capital. This is how the Mumbai Crime Branch was used to stabilize against a possible collapse of the Indian banking system.
Dr. Sester:
The article below from telegraph.uk mentioned that BIS estimates European banks have a $2 trillion funding gap (they borrowed in local currencies to fund purchase of dollar-based assets). It says this explains why demand for dollar is so strong. Do you agree? Does it alter your structurally bearish view on greenback or do you see dollar strengthen further vs the Euro? Thanks.
European banks face a US dollar ‘funding gap’ of almost $2 trillion
The BIS said European and British banks have relied on an “unstable”
source of funding, borrowing in their local currencies to finance “long positions in US dollars”. Much of this has to be rolled over in short-term debt markets. “The build-up of large net US dollar positions exposed these banks to funding risk, or the risk that their funding positions could not be rolled over,” said the BIS.
The report, entitled “US dollar shortage in global banking”, helps explain why there has been such a frantic scramble for dollars each time the credit crisis takes a turn for the worse. Many investors have been wrong-footed by the powerful rally in the dollar against almost all
currencies, except the yen. British banks had accumulated a dollar
“funding gap” of $300bn by mid 2007. The latest BIS data up to the third quarter of 2008 shows that this exposure has been trimmed by “deleveraging” but it still largely hanging over the UK financial institutions.
Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral. The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse. The data is collected with a lag but it appears that there are still huge dollar liabilities to be covered.
Simon Derrick, currency chief at the Bank of New York Mellon, said the implications are obvious. “The global bullion of the last eight years was funded on dollar balance sheets, so the capital destruction we’re seeing leaves banks starved for dollars. Dollar is clearly going to
appreciate a lot further,” he said. * This article has been updated
following reader queries over the complexity of the banks’ “short” and “long” positions in dollars.
the BIS data tells us about the world of last sept. I don’t know of any clear data indicating how much of the funding gap has been closed. the fall in the fed’s swap lines suggests a bit less pressure … but that data point is open to interpretation.
rajesh — the data suggests that yes, the US banks became net borrowers from the int. banks — which seems strange in a world where foreign banks are short dollars. then again, they could all be borrowing from the BIS, which reportedly is flush … and i still don’t have a clear sense of what it means to have a negative liability position in the interbank market. in general banks have liabilities (i.e. they borrow money), not negative liabilities …
Brad: the combined assets of the broker-dealers and funding companies rose by around $325b (if I got the math and netting right)
Me: From L129 and L130 I got an increase of $326.60 b. I took the funding cos investments in broker dealers out of the total assets for 2008 and 2007. The difference could be rounding.
Gee, no information in this post is there? I started reading this at 11:15PM, just as Jeffrey Toobin was saying Bernie Madoff paid his broker-dealer company 4 cents for every trade he didn’t make, meaning they should have known and the money is certainly all tainted no matter what. Back to capital flows …
Isn’t a negative liability merely the sign for direction? So I think you’re right the massive, sudden switch reflects the direction of dollars being sucked out of Europe.
The foreign bank located here sentence is kind of hard to parse but I think you mean the net owed by foreign banks to the foreign offices here dropped substantially, which makes a ton of sense.
To JC, go back a few posts on this blog and check it out and the link to a paper on dollar funding of European banks.
@Brad: The negative liability line probably represents transfers from branches of foreign banks located in the US to their branches outside the US.
Liabilities of US Chartered banks to foreign banks grew from $293.8 b at the end of 2004 to $637.6 b at the end of 2008. This growth creates a picture of increasing borrowings of US banks from foreign banks. Also, the growth in US banks liabilities to foreign banks doesn’t explain the increase in liabilities of foreign bank branches to foreign banks. US Banks liabilities to foreign banks grew from $ 420.3 b at the end of 2006 to $478.2b at the end of 2007, an increase of only $ 57.9 b. The liabilities of foreign branches to foreign banks grew from -$255.3b to -$424.50b between 2006 and 2007, an increase of $ 169.20 billion in owings from foreign banks to their branches here.
I remember seeing a line item in the TIC data reflecting something like claims on foreign banks payable in dollars.I think that might be a better indication of the amount of dollar loans not rolled over/withdrawn from foreign banks.
I looked at line item 5) in the TIC data on “Claims on Foreigners by Type and Counterparty”. The item is called “Foreign Banks, including own foreign offices”.
The claims peaked at $2.170 Trillion in August 2008. The claims declined to $1.937 trillion by December 2008, the latest data vailable at the link below. The decrease of $233 billion in claims payable in dollars by foreign banks and foreign branches of US banks is better reflected in the TIC data.
Also, the level of around $2 trillion tallies more closely with the BIS estimate of the dollar funding gap faced by foreign banks. The total liability of US banks to foreign banks by end 2008 – $ 637.6 b is probably not reflective of the total amount of dollar funding circulating in foreign banking systems.
http://www.treas.gov/tic/bctype.txt
In the TIC link above, you can see a memo item showing the break up of dollars lent out to foreign offices of US banks versus the total claims payable in dollars by foreign banks. In December 2008, out of a total claims of $ 1.937 trillion, $ 1.736 trillion was from foreign offices of US banks. So, around $201 billion was owed by foreign banks in all, payable in dollars, according to the TIC link.The liabilities of US chartered banks was $ 636.7 b to foreign banks at the same time, according to the Fed flow of funds data.
For the system as a whole, interbank
May be the sum of the parts provided a
filled by the central banks swap agreement?
China ‘worried’ about US Treasury holdings
Premier Wen Jiabao noted that Beijing is the biggest foreign creditor to the United States and called on Washington to see that its response to the global slowdown does not damage the value of Chinese holdings.
“We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a news conference following the closing of China’s annual legislative session. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”
Analysts estimate that nearly half of China’s $2 trillion in currency reserves are in U.S. Treasuries and notes issued by other government-affiliated agencies.
http://biz.yahoo.com/ap/090313/as_china_us_economy.html
About US$1 trillion of China’s foreign exchange reserves, which increased 27% last year to $1.95 trillion, is invested in US government bonds and other dollar denominated securities. China held $696.2 billion in US government bonds as of December, up from $681.9 billion a month earlier, according to the US Treasury international capital flow report released on February 18.
China has accelerated its purchases of Treasury debt since August 2008, when holdings grew by $23.7 billion month-on-month to US$541.4 billion. By September, it had holdings of Treasury debt worth $585 billion, more than Japan, previously the top holder of US Treasuries. In August 2008, Japan cut its holdings to $573 billion from $586 billion.
http://www.atimes.com/atimes/China_Business/KC14Cb01.html
the comments have veered quite far off topic.
Relevant insights? YES.
‘Wonky’? NO.
I’ve wanted to dive into this stuff since my undergrad days. Time’s a wastin.
UNODC/reuters take on 7)
Brad:”No doubt though I am missing things here. Help tracing the impact of the crisis on the domestic flow of funds would be most appreciated”
Got me Brad. I thought I was in charge of wonky.
But in our mutual self defense, after wading thru the Flow of Funds report a couple of times I decided it should have a couple of companion publications. The first being a one time publication entitled “Instructions and guidelines to reading and understanding the Flow of Funds report”. The second being a recurring report entitled “Analysis and conclusions relating to highlighted trends evident in the Flow of Funds report.”
I spent a little more time with the data and since interbank liabilities are reflected as “Liabilities not identified as assets” I think they can indeed have a sign indicating direction in which the obligation flows. (In other words, right or wrong, I’m sticking with my first conclusion.) If these things were moved to different accounting columns, we’d see only the “positive” liabilities, meaning what an entity owes not what is owed as a net interbank liability. I don’t know why they treat them as “not identified as assets.” Nor do I know how they’d flow through to other parts of a balance sheet.
Somewhere in the comments, Indian INvestor notes “The negative liability line probably represents transfers from branches of foreign banks located in the US to their branches outside the US.” I think he’s right. Reading the Feds notes on the funds flow tables, it appears that they generally account this way for flows from subs inside the US to parents abroad. You’ll see this if you look at the notes for funding corporations. For these notes, go to the entry page for all the funds flow stuff, and click on one of the green boxes near the top.
In case you don’t care to click-through to my thought, here it is in a nutshell:
By paying interest on excess reserves, the Fed surely also placed a floor under the risk-adjusted returns for anybody with access to a US depository institution, including foreign branches of US banks and foreign banks with branches in America. The only difference is that those groups would also have had exchange-rate risk to incorporate.
I’m not sure about the change in liabilities to domestic banks, but the change in liabilities to foreign banks represents a net loan of $337.6 billion from foreign banks to US banks over that last quarter.
Could that be foreign banks indirectly making use of the Fed’s interest payments on excess reserves?
Want to add that I was reading through the paper by McGuire and von Peter and noticed again this part, which supports the idea above:
Since the onset of the crisis, European banks’ net US dollar claims on non-banks have declined by more than 30% (Graph 5, bottom left-hand panel). This was primarily driven by greater US dollar liabilities booked by European banks’ US offices, which include their borrowing from the Federal Reserve lending facilities.19, 20 Their local liabilities grew by $329 billion (13%) between Q2 2007 and Q3 2008, while their local assets remained largely unchanged (Graph 6, left-hand panel). This allowed European banks to channel funds out of the United States via inter-office transfers (right-hand panel), presumably to allow their head offices to replace US dollar funding previously obtained from other sources.