The Anatomy of a Financial Crisis: The Evolution of Runs in the Asset-Backed Commercial Paper Market Daniel Covitz, Nellie Liang, and Gustavo Suarez* Federal Reserve Board San Francisco, January 2, 2009 * The views expressed here do not reflect those of the Federal Reserve System or its Board of Governors.
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The Anatomy of a Financial Crisis: The Evolution of Runs in the Asset-Backed Commercial Paper Market Daniel Covitz, Nellie Liang, and Gustavo Suarez* Federal.
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The Anatomy of a Financial Crisis:
The Evolution of Runs in the Asset-Backed Commercial Paper Market
Daniel Covitz, Nellie Liang, and Gustavo Suarez*Federal Reserve Board
San Francisco, January 2, 2009
* The views expressed here do not reflect those of the Federal Reserve System or its Board of Governors.
2
Overview
I. Asset-Backed Commercial Paper (ABCP) in 2007II. Why ABCP programs may be subject to “runs”III. Differences across ABCP programsIV. Measuring runsV. Explaining runsVI. Conclusions
3
The ABCP market in 2007: Outstandings
4
The ABCP market in 2007: Spreads
0
10
20
30
40
50
60
70
80
90
100
16
-Ma
y-0
7
13
-Ju
n-0
7
11
-Ju
l-07
8-A
ug
-07
5-S
ep
-07
3-O
ct-0
7
31
-Oct
-07
28
-No
v-0
7
26
-De
c-0
7
23
-Ja
n-0
8
20
-Feb
-08
19
-Ma
r-0
8
16
-Ap
r-0
8
14
-Ma
y-0
8
11
-Ju
n-0
8
basis points
Source: Federal Reserve Board based on data from DTCC
daily
Overnight ABCP spread
5
Why ABCP programs may be subject to runs
• Run-like episodes in the unsecured commercial paper market: Penn Central in 1970 (Calomiris, 1995)
• Most ABCP programs share bank-like features:
1. Assets are opaque
2. Liabilities are shorter-term and more liquid than assets
3. Explicit mechanisms to mitigate maturity/liquidity mismatch
6
Types of ABCP programs
7
Sponsors in the ABCP market
Sponsors typically provide liquidity and/or credit support
Sponsor type provides information about credit and liquidity risks
Types of sponsors:1. Large US banks2. Small US banks3. Non-US banks4. Nonbanking institutions
8
Measuring runs: Methodology
• Use transaction-level data from DTCC for all programs in the US market. Weekly, Jan-Dec, 2007
• Define a run on an ABCP program as occurring if a program is unable to issue new paper to fund maturing obligations
, -1
Maturing1 if 0.1 and Issuance 0
Outstanding
Run 1 if Run 1 and Issuance 0
0 otherwise
itit
it
it i t it
9
Measuring Runs: Results
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2-J
an
16
-Ja
n
30
-Ja
n
13
-Fe
b
27
-Fe
b
13
-Mar
27
-Mar
10
-Ap
r
24
-Ap
r
8-M
ay
22
-May
5-J
un
19
-Ju
n
3-J
ul
17
-Ju
l
31
-Ju
l
14
-Au
g
28
-Au
g
11
-Se
p
25
-Se
p
9-O
ct
23
-Oct
6-N
ov
20
-No
v
4-D
ec
18
-De
c
weekly
Fraction of ABCP programs experiencing "runs"
Runs appear to have occurred in the ABCP roughly starting in Aug 2007:
10
Measuring Runs: Results
0%
10%
20%
30%
40%
50%
60%2
-Ja
n
16
-Ja
n
30
-Ja
n
13
-Fe
b
27
-Fe
b
13
-Mar
27
-Mar
10
-Ap
r
24
-Ap
r
8-M
ay
22
-May
5-J
un
19
-Ju
n
3-J
ul
17
-Ju
l
31
-Ju
l
14
-Au
g
28
-Au
g
11
-Se
p
25
-Se
p
9-O
ct
23
-Oct
6-N
ov
20
-No
v
4-D
ec
18
-De
c
Fraction of ABCP programs experiencing runs
Unconditional hazard of leaving the run state
weekly
ABCP runs were absorbing states starting Aug 2007:
11
Explaining runs: Methodology
Similar to literature on traditional bank runs:
• Gorton (1988), National Banking Era crises• Calomiris and Mason (2003), 1930s failures
Primary hypotheses:
H1: Runs are related to program fundamentals
H2: Runs are triggered by panic
12
Explaining runs: Methodology
Fundamentals: Program-level variables• Program type: proxy for mortgage exposure in assets• Sponsor type: proxy for support strength• Contractual features and ratings
“Panic”: Time dummies (common to all programs)
Starting in Aug 2007, run one regression per month with weekly observations:
Pr(Run 1)
Program type Sponsor type Extendibility Rating D
it
j ij k ik i it t tF
13
August September October November DecemberMarginal effect
Program Multi seller -0.024 -0.101 -0.067 -0.102 -0.104type [0.048] [0.068] [0.071] [0.076] [0.080]
Observations 1385 1109 1427 1140 1143Number of programs 292 293 298 296 297Pseudo R-squared 0.164 0.165 0.164 0.192 0.202Robust standard errors in bracketsIndicator variables are excluded from the regression when their taking value 0 or 1 predicts run or no run perfectly.
Dependent variable: Probability of experiencing a run
Regression 3Sample: October 2007
Regression 4Sample: November 2007
Regression 2Sample: September
2007
Regression 5Sample: December 2007
Regression 1Sample: August 2007
Dummy for the second week of the month
Dummy for the fifth week of the month
Dummy for the fourth week of the month
Dummy for the third week of August
Dummy for the first week of the month
32
Month Week time dummy Events in Money Markets July Week 1 (ending July
American Home Mortgage declares bankruptcy (Aug 6) Three single-seller mortgage ABCP programs extend
the maturity of their paper (Aug 6)
Week 3 (ending Aug 15)
BNP halts redemptions at two affiliated funds (Aug 9) ECB injects liquidity in money markets (Aug 9) Federal Reserve provides liquidity (Aug 10) Canadian ABCP market seizes up (Aug 14)
Week 4 (ending Aug 22)
Countrywide taps on its credit lines (Aug 16) Federal Reserve cuts primary credit rate 50 basis
points (Aug 17) An ABCP program affiliated with KKR Financial extends
the maturity of its paper (Aug 20) An SIV-lite sponsored by Solent Capital defaults on its
ABCP (Aug 22)
Week 5 (ending Aug 29)
A second ABCP program affiliated with KKR Financial extends the maturity of its paper (Aug 23)
Investment-quality ABCP accepted as discount-window collateral at the Federal Reserve (Aug 24)
33
Month Week time dummy Events in Money Markets September Week 1 (ending Sept
5) An SIV program sponsored by Cheyne Capital
Management draws on its credit lines (Aug 30). Moody’s downgrades or placed under review the
ratings of several ABCP programs issued by SIVs (Sept 5)
Week 2 (ending Sept
12) SIFMA, the American Securitization Forum, and the
European Securitization Forum recommend disclosure of holdings by ABCP programs (Sept 12)
Week 3 (ending Sept
19) Federal Reserve cuts fed funds target rate 50 basis
points (Sept 18)
Week 4 (ending Sept 26)
34
Month Week time dummy Events in Money Markets October Week 1 (ending Oct 3)
Week 2 (ending Oct 10)
Week 3 (ending Oct 17)
Citigroup, Bank of America, and JP Morgan Chase announced the M-LEC to backstop paper issued by SIVs (Oct 15)
An SIV program sponsored by Cheyne Capital Management defaults (Oct 17)
Week 4 (ending Oct 24)
An SIV program sponsored by IKB Credit Management defaults (Oct 18)