Asset-backed commercial paper, blamed for amplifying the 2008 financial crisis, is making a comeback as banks turn to the short-term funding market to do more business with less strain on their balance sheets. Once a way for Wall Street to finance everything from mortgage lending to complex structured credit products, the market has largely evolved into a tool for banks to manage balance-sheet constraints, helping them meet liquidity buffer requirements and fund client positions without tying up as much of their own capital.
ABCP outstanding has surged to more than half a trillion dollars, according to the latest Federal Reserve data. While that is still less than half its pre-crisis peak, it is twice the size it was just five years ago. Banks can finance assets or client activity through a third party operating an ABCP conduit, which raises short-term cash from money-market funds and other investors and uses the proceeds to enter into repo, total-return swap and other financing transactions with banks. "It's balance-sheet efficiency for mostly financial institutions," said Jerry Marlatt, a partner at Mayer Brown who focuses on structured finance.
The market was once used to finance subprime mortgage bonds and other securitized debt, swelling to about $1.2 trillion before fears of a housing downturn spread in 2007. Money funds and other investors stopped rolling the paper, causing a run on the market. "That created a bubble and the bubble popped," said Matthew Grimes, head of money-market research at Allspring Global Investments. The market then shrank to about $210 billion by 2015.
Today's growth is driven partly by tougher leverage and liquidity requirements that have made it more expensive for banks to fund assets directly. That demand has fueled the rise of independent sponsors such as Nearwater, Guggenheim and Northcross, and independently sponsored conduits now account for roughly 42% of ABCP outstanding, according to JPMorgan Chase & Co. strategists. Market participants say the market is far more resilient than two decades ago.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing