Figure 1. Stylized Diagram of the Bank Internal Capital Markets.
This diagram provides a stylized illustration of the various segments of the internal capital market within a banking organization.
This diagram shows a stylized view of all external sources of financing as well as any internal lending exposures between affiliate legal entities within the banking organization. In other words, since all internal funds must ultimately be sourced from external funds, this diagram is meant to keep track of the flow of funds through the organization. It starts with a large rectangle that represents the entire banking organization. Within this BHC, I define three groups of legal entity types. The first is the U.S. parent holding company. It is represented by a small square that sits near the top of the inside of the organization box. The parent holding company funds itself using publicly issued equity, long term corporate bonds, and short term commercial paper. These two external sources of funds are represented by grey arrows that are positioned outside of the organization box, and are pointing towards the parent holding company, indicating that these external funds enter the organization through this holding company. The parent holding company takes these external funds, and allocates them as internal funding for subsidiaries downstream. There are four types of internal allocations. The first are internal cash deposits at commerical bank subsidiaries. The second are equity claims on commercial bank subsidiaries. The third are internal term loans to non-bank subsidiaries. The fourth are equity claims on the non-bank subsidiaries. This leads us to the two categories of subsidiaries. The first are commercial bank subsidiaries. These are commercial bank subsidiaries that have been chartered by regulators. I represent this type as a box sitting at the bottom left hand corner of the inside of the organization box. The second are non-bank subsidiaries. These represents any entity that is not a chartered commercial bank, i.e. broker dealers, mortgage finance companies, SPVs, etc. Because this paper is on dealers and the internal collateralized funding between them, I only show broker dealer subsidiaries here for simplicity. These non-bank subsidiaries are positioned on the bottom right hand corner of the organization box. Within this commercial bank subsidiaries box, there are loans between the US head office and foreign branches of the commercial bank subsidiaries. These are known as inter-branch loans (denoted with purple arrows going to and from US office and foreign branches. The US head office raises FDIC-insured deposits from external depositors, and the foreign branch raises uninsured foreign deposits from external foreign depositors. For the non-bank subsidiares, these broker dealer siblings primarily have collateralized loans between each other, known as internal repurchase agreements and internal securities lending. These are denoted by the blue arrows between the US and foreign broker dealer siblings. I have circled this non-bank subsidiaries segment of the organization to emphasize that my paper focuses on this portion of the internal capital market. These broker dealer siblings also raise external collateralized financing, which I have denoted as repo. The Federal Reserve 23A Act limits the amount of loans that US commercial bank subsidiaries can extend to non-bank siblings. This is denoted in the diagram with a dashed line separating the US commercial bank (bottom left) from the non-bank subsidiaries (bottom right).
Figure 2. Simplified Balance Sheet View, U.S. Primary Dealer Subsidiaries
This diagram shows a balance sheet of a typical U.S. Primary Dealer. On the asset side, it has two types of assets. The first are claims on external counterparties a.k.a. external assets, and the other are claims on sibling a.k.a. internal assets. On the liabilities side, it has three categories. The first are borrowings from external counterparties a.k.a. external liabilities. The second are borrowings from sibling affiliate institutions a.k.a. internal liabilities. The third is subsidiary equity, which is owned by the parent institution (typically a holding company). Internal assets and internal liabilities have been written in red color, while external assets and liabilities have been written in blue text.
Figure 3a. Funding Model, U.S. Primary Dealer Subsidiaries.
This figure presents the dollar amount of liabilities that face external counterparties versus internal counterparties, aggregated across U.S. primary dealer subsidiaries.
US Primary Dealers (Subsidiary-only), Aggregate
Trillions USD
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
year | Internal Liabilities | External Liabilities |
---|---|---|
2001 | 0.335 | 0.847 |
2002 | 0.382 | 0.918 |
2003 | 0.515 | 1.127 |
2004 | 0.469 | 1.158 |
2005 | 0.765 | 1.555 |
2006 | 0.951 | 1.818 |
2007 | 1.202 | 2.177 |
2008 | 0.870 | 1.626 |
2009 | 0.906 | 1.629 |
2010 | 0.710 | 1.563 |
2011 | 0.837 | 1.610 |
2012 | 0.871 | 1.666 |
2013 | 0.818 | 1.567 |
2014 | 0.843 | 1.458 |
Figure 3b. Internal Liability Share, U.S. Primary Dealer Subsidiaries.
This figure presents interaffiliate liabilities as a share of total liabilities, aggregated across U.S. primary dealer subsidiaries.
Median, US Primary Dealers
Internal Liabilities / Total Liabilities (%)
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
year | Internal Liabilities |
---|---|
2001 | 0.257 |
2002 | 0.258 |
2003 | 0.239 |
2004 | 0.287 |
2005 | 0.296 |
2006 | 0.333 |
2007 | 0.322 |
2008 | 0.341 |
2009 | 0.374 |
2010 | 0.310 |
2011 | 0.327 |
2012 | 0.364 |
2013 | 0.340 |
2014 | 0.366 |
Figure 4. Internal Repo and Securities Lending, Detailed Balance Sheet View
This diagram shows the balance sheets of the US primary dealer subsidiary and the foreign broker dealer subsidiary within a banking organization. The purpose of this diagram is to show where an internal repo and securities loan transaction (a liability for US primary dealer and an asset for the foreign broker dealer) would appear on the subsidiary-level balance sheets.
On the left, there is a balance sheet for the US primary dealer. Asset categories include external cash, external financial instruments owned, external brokerage receivables, external reverse repurchase agreements and securities borrowing, internal brokerage receivables, and internal reverse repurchase agreements and securities borrowing. Liability categories include external securites sold but not yet purchased, external brokerage payables, external short term unsecured debt, external repurchase agreements and securites lending, internal long term unsecured debt, internal short term unsecured debt, internal brokerage payables, and internal repurchase agreements and securities lending. There is one equity category denoted as subsidiary equity. On the right, there is a balance sheet for the foreign broker dealer subsidiary. It contains the same asset, liability, and equity categories, respectively. To denote the transaction of interest (an internal repurchase agreement / securites loan between the US primary dealer and the foreign broker dealer affiliate), I show an arrow pointing from the internal reverse repurchase agreement and securities borrowing (asset) category on the foreign broker dealer subsidiary balance sheet. This arrow points to the internal repurchase agreement and securities lending (liability) category on the US primary dealer balance sheet. If the transaction is a securites loan, then either cash or securites flow from the foreign broker dealer to the US primary dealer while collateral flows in reverse. If the transaction is a repo, then only cash flows from the foreign broker dealer to the US primary dealer while collateral flows in reverse. The arrow and the two balance sheet categories of interest are all in red color.
Figure 5. Composition of Internal Liabilities, U.S. Primary Dealer Subsidiaries.
This graph provides a time series of the dollar amounts for each type of internal liability from figure 4, aggregated across U.S. primary dealer
subsidiaries.
Billions USD
US Primary Dealers (Subsidiary-only), Aggregate
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
year | Internal ST Unsecured Debt | Internal Repo & Securities Lending | Internal Brokerage Payables | Internal LT Unsubordinated Debt |
---|---|---|---|---|
2001 | 81.131 | 182.182 | 38.715 | 31.019 |
2002 | 95.753 | 218.515 | 28.947 | 35.310 |
2003 | 96.984 | 310.534 | 58.531 | 42.741 |
2004 | 73.762 | 287.940 | 67.224 | 34.707 |
2005 | 119.871 | 505.265 | 77.716 | 56.202 |
2006 | 146.525 | 635.933 | 98.470 | 58.634 |
2007 | 144.668 | 797.550 | 157.367 | 90.290 |
2008 | 124.702 | 504.625 | 135.832 | 96.408 |
2009 | 185.996 | 508.977 | 129.012 | 76.544 |
2010 | 148.939 | 369.618 | 131.716 | 105.976 |
2011 | 95.560 | 475.175 | 145.954 | 104.877 |
2012 | 99.671 | 531.313 | 140.417 | 91.746 |
2013 | 123.298 | 446.504 | 140.896 | 96.879 |
2014 | 84.619 | 461.209 | 148.441 | 135.889 |
Figure 6a. Internal versus External Repo.
This figure presents the dollar amount of interaffiliate versus external repo, aggregated across U.S. primary dealer subsidiaries.
US Primary Dealers (Subsidiary-only), Aggregate
Billions USD
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
Year | External Repo | Internal Repo |
---|---|---|
2001 | 347.647 | 85.364 |
2002 | 423.724 | 89.741 |
2003 | 479.371 | 120.717 |
2004 | 498.671 | 116.975 |
2005 | 716.568 | 195.909 |
2006 | 818.036 | 265.848 |
2007 | 968.342 | 398.901 |
2008 | 828.481 | 325.503 |
2009 | 863.088 | 330.051 |
2010 | 838.176 | 241.983 |
2011 | 799.023 | 334.649 |
2012 | 899.099 | 361.276 |
2013 | 722.949 | 258.433 |
2014 | 605.054 | 256.964 |
Figure 6b. Internal versus External Securities Lending.
This figure presents the dollar amount of interaffiliate versus external securities lending, aggregated across U.S. primary dealer subsidiaries.
US Primary Dealers (Subsidiary-only), Aggregate
Billions USD
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
Year | External Securities Lending | Internal Securities Lending |
---|---|---|
2001 | 63.794 | 96.818 |
2002 | 70.390 | 128.774 |
2003 | 91.106 | 189.817 |
2004 | 119.660 | 170.965 |
2005 | 140.044 | 309.356 |
2006 | 174.763 | 370.085 |
2007 | 181.210 | 398.649 |
2008 | 59.914 | 179.122 |
2009 | 62.281 | 178.926 |
2010 | 45.592 | 127.635 |
2011 | 62.648 | 140.525 |
2012 | 63.642 | 170.037 |
2013 | 63.655 | 188.071 |
2014 | 51.304 | 204.245 |
Figure 7. Internal Reverse Repo and Securities Borrowing, Detailed Balance Sheet View
This diagram shows the balance sheets of the US primary dealer subsidiary and the foreign broker dealer subsidiary within a banking organization. The purpose of this diagram is to show where an internal reverse repurchase agreement and securities borrowing transaction (an asset for US primary dealer and a liability for the foreign broker dealer) would appear on the subsidiary-level balance sheets.
On the left, there is a balance sheet for the US primary dealer. Asset categories include external cash, external financial instruments owned, external brokerage receivables, external reverse repurchase agreements and securities borrowing, internal brokerage receivables, and internal reverse repurchase agreements and securities borrowing. Liability categories include external securites sold but not yet purchased, external brokerage payables, external short term unsecured debt, external repurchase agreements and securites lending, internal long term unsecured debt, internal short term unsecured debt, internal brokerage payables, and internal repurchase agreements and securities lending. There is one equity category denoted as subsidiary equity. On the right, there is a balance sheet for the foreign broker dealer subsidiary. It contains the same asset, liability, and equity categories, respectively. To denote the transaction of interest (an internal reverse repurchase agreement / securites borrowing between the US primary dealer and the foreign broker dealer affiliate), I show an arrow pointing from the internal reverse repurchase agreement and securities borrowing (asset) category on the US primary dealer subsidiary balance sheet. This arrow points to the internal repurchase agreement and securities lending (liability) category on the foreign broker dealer balance sheet. If the transaction is a securites loan, then either cash or securites flow from the US primary dealer to the foreign broker dealer affiliate while collateral flows in reverse. If the transaction is a repo, then only cash flows from the US primary dealer to the foreign broker dealer affiliate while collateral flows in reverse. The arrow and the two balance sheet categories of interest are all in red color.
Figure 8. Internal versus External Assets.
This figure presents the dollar amount of assets that face external counterparties versus internal counterparties, aggregated across U.S. primary dealer subsidiaries.
US Primary Dealers (Subsidiary-only), Aggregate
Trillions USD
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
year | Internal Assets | External Assets |
---|---|---|
2001 | 0.157 | 1.056 |
2002 | 0.140 | 1.193 |
2003 | 0.233 | 1.448 |
2004 | 0.221 | 1.440 |
2005 | 0.378 | 1.982 |
2006 | 0.439 | 2.377 |
2007 | 0.661 | 2.767 |
2008 | 0.573 | 1.972 |
2009 | 0.521 | 2.090 |
2010 | 0.461 | 1.877 |
2011 | 0.530 | 1.975 |
2012 | 0.509 | 2.107 |
2013 | 0.445 | 2.022 |
2014 | 0.456 | 1.924 |
Figure 9. Net Internal Exposure.
This figure presents the netted amount of internal assets (a.k.a. internal assets - internal liabilities), aggregated across U.S. primary dealer subsidiaries. As the majority of this is collateralized, a negative
value implies that collateral travels, on net, from the U.S. primary dealer outward to affiliates.
US Primary Dealers (Subsidiary-only), Aggregate
Billions USD
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
year | Net Internal Exposure |
---|---|
2001 | -178.389 |
2002 | -241.904 |
2003 | -282.447 |
2004 | -247.550 |
2005 | -387.150 |
2006 | -512.685 |
2007 | -540.587 |
2008 | -297.192 |
2009 | -385.113 |
2010 | -249.160 |
2011 | -306.561 |
2012 | -361.648 |
2013 | -372.965 |
2014 | -387.001 |
Figure 10. Subsidiary-only versus Consolidated Leverage.
This figure shows the median amount of leverage on the subsidiary-level balance sheet versus that on the consolidated organization balance sheet. Note that organization leverage is
represented as Risk-Weighted Assets (RWA) / Tier 1 Capital for BHCs and FBOs and as Total Assets / Total Equity for IBs (since IBs did not report tier 1 capital and RWAs pre-crisis), while subsidiary leverage is Total Assets / Total Equity (since dealers do not report tier 1 capital and
RWAs).
Leverage Ratio (Assets/Equity)
Annual Frequency, Includes Credit Suisse, Barclays, BNP, JPM, Citi, BofA, Goldman, Morgan Stanley, Bear, Merrill
year | Consolidated Leverage | US Primary Dealer Subsidiary Leverage |
---|---|---|
2001 | 20.212 | 41.105 |
2002 | 18.282 | 41.861 |
2003 | 16.626 | 40.034 |
2004 | 20.022 | 59.109 |
2005 | 19.130 | 64.168 |
2006 | 21.551 | 67.044 |
2007 | 26.163 | 87.296 |
2008 | 12.803 | 56.477 |
2009 | 9.896 | 40.005 |
2010 | 8.773 | 36.870 |
2011 | 8.639 | 36.127 |
2012 | 7.492 | 31.437 |
2013 | 7.784 | 32.967 |
2014 | 8.731 | 30.026 |