Finance and Economics Discussion Series: Accessible versions of figures for 2021-036

The Internal Capital Markets of Global Dealer Banks

Accessible version of figures


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).

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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.

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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

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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

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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.

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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

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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

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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

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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.

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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

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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

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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

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