Conjoncture: Credit intermediation in the United States (Wed, May 16 2012)

The US financial system is undoubtedly the best example of the interconnection of intermediated and market financing. With the development of securitisation and asset management techniques in the 1980s, entities outside the regular banking sector -- i.e. issuers of asset-backed securities (ABS), government sponsored enterprises (GSEs) and finance companies -- moved into the mortgage market and helped transform the financing structure of the US economy. The "originate to distribute" model (OTD) took hold in the United States: banks no longer held the loans they originated on balance sheet, but sold them off. The segmentation of the US banking market, a legacy of earlier banking laws that persisted through the deregulation movement (1970-90), also contributed to the development of equity and bond markets in the United States, which are now the main source of financing for US non-financial companies (NFC). For eurozone banks, in contrast, the "originate to hold" model predominates, and bank intermediation has always played an important role in both household and corporate financing.

In this article, we propose to take a long-term view to evaluate the impact that the surge in parallel finance has had on the financial system, intermediation, bank balance sheets and net banking income in the United States.

At a time when new regulatory requirements are handicapping intermediated financing and securitisation is coming under greater oversight, European banks are restructuring their corporate finance activities. In the United States, in contrast, liquidity is still abundant in the capital markets and so far the OTD model does not seem to have been called into question. Although there is some talk about withdrawing federal guarantees from the mortgage market -- the only real leverage for transforming the American model -- it seems to be hypothetical at best from a medium-term perspective.

The OTD model and the structure of the US financial system

Based on the Federal Reserve's Flow of Funds statement, Table 1 shows the breakdown of the US financial sector into three sub-sectors: monetary financial institutions (MFI); insurance companies & pension funds; and other financial intermediaries (OFI), to use the terminology of the European System of Accounts (ESA 95). To highlight the special structure of the American financial system, we compare it with that of the eurozone based on 1) the financial statements and balance sheets of institutional sub-sectors presented by the ECB, and 2) the breakdown of 2010 financial assets proposed in an article in the ECB Monthly Bulletin (January 2012) 1 . Note that the designated subsectors are not strictly identical between regions. Most importantly, in the US, "banks" are defined as private depository institutions, while a much broader definition is used in Europe that covers all credit institutions, including captive financial companies 2 which do not collect deposits. Moreover, valuation rules may differ between money market funds, which are referred to as Money Market Mutual Funds (MMMF) in the United States and OPCVM monétaires in the eurozone 3 . It is also important to note that this breakdown is not intended to propose a measure of the size of shadow banking 4 , comparable or opposable to the one developed by the Financial Stability Board (FSB), which for valuation purposes, pools together Other Financial Intermediaries (OFI) (excluding GSEs in the US) and money market funds (chart 1).