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Philipp Schnabl - One of the best experts on this subject based on the ideXlab platform.
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Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007–09
IMF Economic Review, 2010Co-Authors: Viral V. Acharya, Philipp SchnablAbstract: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. This Paper examines this explanation by analyzing the geography of asset-backed Commercial Paper (ABCP) conduits set up by large Commercial banks. The Paper shows that banks in surplus countries as well as banks in deficit countries manufactured riskless assets, totaling over $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. The Paper concludes that global banking flows, rather than global imbalances, determined the geography of the financial crisis.
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do global banks spread global imbalances the case of asset backed Commercial Paper during the financial crisis of 2007 09
IMF Economic Review, 2010Co-Authors: Viral V. Acharya, Philipp SchnablAbstract: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. This Paper examines this explanation by analyzing the geography of asset-backed Commercial Paper (ABCP) conduits set up by large Commercial banks. The Paper shows that banks in surplus countries as well as banks in deficit countries manufactured riskless assets, totaling over $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. The Paper concludes that global banking flows, rather than global imbalances, determined the geography of the financial crisis.
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When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007–2009
Journal of Economic Perspectives, 2010Co-Authors: Marcin Kacperczyk, Philipp SchnablAbstract:Commercial Paper is a short-term debt instrument issued by large corporations. The Commercial Paper market has long been viewed as a bastion of high liquidity and low risk. But twice during the financial crisis of 2007–2009, the Commercial Paper market nearly dried up and ceased being perceived as a safe haven. Major interventions by the Federal Reserve, including large outright purchases of Commercial Paper, were eventually used to support both issuers of and investors in Commercial Paper. We will offer an analysis of the Commercial Paper market during the financial crisis. First, we describe the institutional background of the Commercial Paper market. Second, we analyze the supply and demand sides of the market. Third, we examine the most important developments during the crisis of 2007–2009. Last, we discuss three explanations of the decline in the Commercial Paper market: substitution to alternative sources of financing by Commercial Paper issuers, adverse selection, and institutional constraints among money market funds.
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do global banks spread global imbalances the case of asset backed Commercial Paper during the financial crisis of 2007 09
National Bureau of Economic Research, 2010Co-Authors: Viral V. Acharya, Philipp SchnablAbstract: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.
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When Safe Proved Risky: Commercial Paper During the Financial Crisis of 2007-2009
SSRN Electronic Journal, 2009Co-Authors: Marcin Kacperczyk, Philipp SchnablAbstract:Commercial Paper is one of the largest money market instruments and has long been viewed as a safe haven for investors seeking low risk. However, during the financial crisis of 2007-2009, the Commercial Paper market experienced twice the modern-day equivalent of a bank run with investors unwilling to refinance maturing Commercial Paper. We analyze the supply of and demand for Commercial Paper and show that, in contrast to previous turbulent episodes, the crisis centered on Commercial Paper issued by, or guaranteed by, financial institutions. We describe the importance of Federal Reserve's interventions in restoring stability of the market. Finally, we propose three possible explanations for the sharp decline of the Commercial Paper market: substitution to alternative sources of financing by Commercial Paper issuers, adverse selection, and institutional constraints among money market funds.
Drew B. Winters - One of the best experts on this subject based on the ideXlab platform.
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Financial crisis solutions in the Commercial Paper market: An analysis of the CPFF and the TLGP
Managerial Finance, 2019Co-Authors: Joshua Fairbanks, Mark D. Griffiths, Drew B. WintersAbstract:Purpose The purpose of this Paper is to examine programs designed to support the Commercial Paper market during the financial crisis. Design/methodology/approach The Paper analyzes the participants in the two programs to determine why domestic financial institutions chose one program over the other. Findings Domestic financial institutions chose the Temporary Liquidity Guarantee Program over the Commercial Paper Funding Facility (CPFF) while foreign financial institutions chose the CPFF. Practical implications The analysis is intended to support future policy debate on how to address a liquidity crisis in the money markets. Originality/value The authors are the first Paper to examine the participants in these two programs. The value is the policy implications of this study.
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Benefits from Lending Relationships in Public Debt Markets: Empirical Evidence from the Commercial Paper Market
Quarterly Journal of Finance and Accounting, 2015Co-Authors: David W. Blackwell, Vladimir Kotomin, Drew B. WintersAbstract:Introduction The global financial crisis has brought attention to the money markets with specific discussions related to their primary characteristics: low credit risk and high liquidity. As the first signs of the crisis were felt in the money markets in the summer of 2007, front-page articles in the Wall Street Journal discussed how investors have fled Commercial Paper for the safety of Treasury bills as the Federal Reserve pumped billions of dollars of additional liquidity in the market. Countrywide Financial Corporation (a large nationwide mortgage lender) was a prime example of the impact of the crisis on the Commercial Paper market as it drew on its bank lines of credit when it was unable to raise the necessary funds in the Commercial Paper market. These articles raise the question of how borrowers in the Commercial Paper market maintain access to credit during liquidity squeezes. Diamond (1989) argues that borrowers develop reputation through repeated successful debt transactions with a bank, which allows them to reduce their loan rate over time. Diamond (1989) spawned a body of empirical literature on the value of lending relationships, with the following being representative examples. Petersen and Rajan (1994) find that an ongoing relationship with a lender increases the amount of debt available to the borrower. Berger and Udell (1995) find that lending relationships reduce the rate charged to the borrower on a line of credit and reduce the need for collateral to support the line. Blackwell and Winters (1997) also find that lending relationships reduce the rate charged on lines of credit and reduce the monitoring efforts of the lender. Lending relationships may benefit lenders, too. Yasuda (2005) finds that bank relationships have positive and significant effects on a firm's underwriter choice, and Bharath et al. (2007) find that relationship lenders' informational advantage allows them to sell more information-sensitive products to its borrowers. Financial intermediaries such as banks do not suffer from lack of motivation to monitor their borrowers (as public debt market participants may) and thus are considered superior information producers and monitors. Diamond (1991) extends Diamond (1989) and argues that borrowers who develop sufficient reputation through successful transactions with a bank can leave the intermediated market and borrow directly in the public debt markets. Diamond (1991) does not discuss whether firms that borrow in the public debt markets can benefit from developing relationships with lenders in these markets. That is, can a borrower in a public debt market increase its access to debt and/or decrease its interest rate on debt by developing direct relationships with lenders? We examine this question by testing for the benefits from direct borrower-lender relationships in the public debt market for Commercial Paper (CP). We take advantage of a well-defined year-end preferred habitat for liquidity (liquidity squeeze) (see Griffiths and Winters 2005a) in CP to examine whether a direct relationship with a CP purchaser (lender) provides better access to credit. We find that the year-end rate increase from the liquidity squeeze is smaller in magnitude and shorter in duration in directly placed than in dealer-placed CP. The smaller size and shorter duration of the squeeze in the directly placed CP market is consistent with the benefits of relationship lending. That is, borrowers who have direct relationships with their lenders are likely to have access to more debt at lower interest rates than other borrowers during periods of constrained liquidity. Our results may be compared to recent research findings on investment banking relationships for public debt issuers. (1) However, investment banks are not lenders in these studies. We examine the value of borrower-lender relationships in public debt markets and find evidence to support the value of relationships when liquidity is constrained. …
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the federal reserve and the 2007 2009 financial crisis treating a virus with antibiotics evidence from the Commercial Paper market
The Financial Review, 2011Co-Authors: Mark D. Griffiths, Vladimir Kotomin, Drew B. WintersAbstract:The two main explanations for the crisis in the Commercial Paper (CP) market are credit concerns and liquidity issues. The CP market is not homogeneous in terms of credit quality, maturities and types of issues. We find that lower credit-quality CP suffered more during the crisis. Additionally, we find little evidence that Federal Reserve (Fed) liquidity facilities reduced the impact of the crisis, but that when the Fed became a lender in the CP market, the crisis pressures were dramatically reduced. We conclude that the crisis in the money markets is related more to increases in credit risk. Liquidity is a secondary issue.
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The Federal Reserve and the 2007–2009 Financial Crisis: Treating a Virus with Antibiotics? Evidence from the Commercial Paper Market
Financial Review, 2011Co-Authors: Mark D. Griffiths, Vladimir Kotomin, Drew B. WintersAbstract:The two main explanations for the crisis in the Commercial Paper (CP) market are credit concerns and liquidity issues. The CP market is not homogeneous in terms of credit quality, maturities and types of issues. We find that lower credit-quality CP suffered more during the crisis. Additionally, we find little evidence that Federal Reserve (Fed) liquidity facilities reduced the impact of the crisis, but that when the Fed became a lender in the CP market, the crisis pressures were dramatically reduced. We conclude that the crisis in the money markets is related more to increases in credit risk. Liquidity is a secondary issue.
Dana Lieberman - One of the best experts on this subject based on the ideXlab platform.
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Commercial Paper Defaults and Rating Transitions, 1972–1995
The Journal of Risk Finance, 1999Co-Authors: Lea V. Carty, Dana LiebermanAbstract:Investors in Commercial Paper (CP) markets include money market mutual funds, corporate treasurers, state and local governments, and Commercial banks and their trust departments. The obligors in the market are predominantly large and highly creditworthy corporations. The credit risks faced by CP investors have been minimal historically. However, the general decline in corporate credit quality that began in the first half of the 1980s set the stage for the spate of credit problems and defaults that took place in many CP markets beginning in 1987. While the incidence of default has decreased since 1991, the credit risks faced by Commercial Paper investors have not subsided to pre‐1987 levels. This analysis addresses concerns generated by this surge in credit risk.
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Commercial Paper defaults and rating transitions 1972 1995
The Journal of Risk Finance, 1999Co-Authors: Lea V. Carty, Dana LiebermanAbstract:Investors in Commercial Paper (CP) markets include money market mutual funds, corporate treasurers, state and local governments, and Commercial banks and their trust departments. The obligors in the market are predominantly large and highly creditworthy corporations. The credit risks faced by CP investors have been minimal historically. However, the general decline in corporate credit quality that began in the first half of the 1980s set the stage for the spate of credit problems and defaults that took place in many CP markets beginning in 1987. While the incidence of default has decreased since 1991, the credit risks faced by Commercial Paper investors have not subsided to pre‐1987 levels. This analysis addresses concerns generated by this surge in credit risk.
John V Duca - One of the best experts on this subject based on the ideXlab platform.
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did the Commercial Paper funding facility prevent a great depression style money market meltdown
Journal of Financial Stability, 2013Co-Authors: John V DucaAbstract:This Paper analyzes how risk premiums altered the use of Commercial Paper relative to bank loans during the recent financial crisis. Consistent with the theoretical and empirical literature on how surges in risk premiums can induce plunges in under-collateralized credit or credit funded with noninsured sources, results indicate that a spike in risk premiums induced a plunge in Commercial Paper use during the recent crisis. This Paper also finds that Federal Reserve interventions in the money market helped prevent the Commercial Paper market from melting down to the extent seen during the early 1930s.
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did the Commercial Paper funding facility prevent a great depression style money market meltdown
MPRA Paper, 2010Co-Authors: John V DucaAbstract:This Paper analyzes how risk premia—and other factors affecting the comparative advantages of security-funded versus deposit-funded short-run debt—altered the relative use of debt funded by securities markets since the early-1960s and the relative use of Commercial Paper during the recent financial crisis. Results indicate that lower risk premia, higher information costs, and reserve requirement costs induce less relative use of Commercial Paper and short-run debt funded by securities markets. This Paper also finds that Federal Reserve interventions in the money market helped prevent the Commercial Paper market from melting down to the extent seen during the early 1930s.
Lea V. Carty - One of the best experts on this subject based on the ideXlab platform.
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Commercial Paper Defaults and Rating Transitions, 1972–1995
The Journal of Risk Finance, 1999Co-Authors: Lea V. Carty, Dana LiebermanAbstract:Investors in Commercial Paper (CP) markets include money market mutual funds, corporate treasurers, state and local governments, and Commercial banks and their trust departments. The obligors in the market are predominantly large and highly creditworthy corporations. The credit risks faced by CP investors have been minimal historically. However, the general decline in corporate credit quality that began in the first half of the 1980s set the stage for the spate of credit problems and defaults that took place in many CP markets beginning in 1987. While the incidence of default has decreased since 1991, the credit risks faced by Commercial Paper investors have not subsided to pre‐1987 levels. This analysis addresses concerns generated by this surge in credit risk.
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Commercial Paper defaults and rating transitions 1972 1995
The Journal of Risk Finance, 1999Co-Authors: Lea V. Carty, Dana LiebermanAbstract:Investors in Commercial Paper (CP) markets include money market mutual funds, corporate treasurers, state and local governments, and Commercial banks and their trust departments. The obligors in the market are predominantly large and highly creditworthy corporations. The credit risks faced by CP investors have been minimal historically. However, the general decline in corporate credit quality that began in the first half of the 1980s set the stage for the spate of credit problems and defaults that took place in many CP markets beginning in 1987. While the incidence of default has decreased since 1991, the credit risks faced by Commercial Paper investors have not subsided to pre‐1987 levels. This analysis addresses concerns generated by this surge in credit risk.