"The decimation of shadow banking that began in summer 2007 set in motion the crisis that has since engulfed the global economy. A much-maligned culprit in this process has been the shadow-banking sector. Despite significant shrinkage due to the crisis, shadow banking still represented, in 2010, more than half of outstanding liabilities in the global financial system (Pozsar et al. 2010). Given the crucial role played by securitisation within shadow banking, it is perhaps unsurprising that both the IMF (2009) and the Financial Stability Board (2009) believe that a less fitful and more confident return of securitisation is the key to a sustainable global recovery.
The structured investment vehicle (SIV) was the shadow bank par excellence. It played the important intermediation role of channelling savings in money market funds, petrodollars, and global trade surpluses to financial institutions and originators of securitised assets across the globe (Tabe 2010). A successful re-launch of securitisation will require SIV-like real money investors to assume the risks erstwhile held by this market segment.
Few were familiar with the $400 billion, 20-year old SIV sector in summer 2007 when it gained notoriety for sudden defaults and multi-notch downgrades by credit rating agencies.
SIVs were hybrid companies that combined features of traditional banking, hedge funds, and securitisation. They borrowed short mainly from money-market funds, and lent long to banks and securitisation issuers, employing leverage to amplify profitability. They issued long-dated hybrid capital comparable to bank subordinated debt. Like securitisation transactions, they were bankruptcy-remote and operated under tight limits..."
at http://www.voxeu.org/index.php?q=node/6716
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