Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09

Viral Acharya and Philipp Schnabl

No 16079, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: F1 F3 G21 G28 G3 (search for similar items in EconPapers)
Date: 2010-06
Note: CF IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (148)

Published as “Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007-09” with Philipp Schnabl, IMF Economic Review, 58, 2010, 37-73

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