Europe Opens $80 Trillion Shadow Banking Pandora's Box: Will Seek To Collapse Repo "Collateral Chains"

Tyler Durden's picture

In what may be the most important story of the day, or maybe year, for a world in which there already is an $11 trillion shortfall in high-quality collateral (and declining every day courtesy of Ben's monetization of Treasury paper) so needed to support the deposit-free liability structures of the shadow banking system (as most recently explained here), Bloomberg has just reported that Europe may begin a crackdown on that most important credit money conduit: the $80 trillion+ global shadow banking system, by effectively collapsing collateral chains, and by making wanton asset rehypothecation a thing of the past, permitted only with express prior permission, which obviously will never come: who in their right mind would allow a bank to repledge an asset which may be lost as part of the counterparty carnage should said bank pull a Lehman. The result of this, should it be taken to completion, would be pervasive liquidations as countless collateral chain margin calls spread, counterparty risk soars all over again, and as the scramble to obtain the true underlying assets finally begins.

From Bloomberg:

Banks and brokers face a clampdown on using assets they hold for clients as collateral for their own trades as part of European Union moves to bolster market stability and rein in shadow banking.


The European Commission is weighing whether firms should have to obtain formal consent from their clients before being allowed to reuse assets to back other trades, according to a document obtained by Bloomberg News. The consent would be enshrined in a “contractual agreement” between the parties.


The handing over of collateral is an integral part of repurchase agreements, or repos -- one of the activities under review by global regulators as part of their efforts to regulate shadow banking. The reuse of clients’ assets poses a potential threat to financial stability should one of a chain of firms that handled the securities go bankrupt, according to the document prepared by commission officials and dated May 15. Uncertainty about who holds an asset can fuel panic in times of market stress, according to the paper.


“Complex” chains of collateral can make it difficult for investors to “identify who owns what, where risk is concentrated and who is exposed to whom,” according to the document. “This has consequences for transparency and financial stability.”


Under the plans being weighed by the commission, banks and brokers holding securities for clients wouldn’t be allowed to reuse the assets for trading on their own account -- speculation on the markets aimed solely at boosting their own revenues, according to the document.




The Financial Stability Board has estimated that the global shadow-banking system was worth $67 trillion in 2011, with EU-based activities accounting for about $31 trillion.

Here's the kicker: collateral chains collapse on their own when confidence and faith in the financial system is evapoarting. This is usually manifested in soaring variation margin, and demand for delivery of collateral (which having been pledged at 10 or more different places just doesn't actually exist).

In other words, the last thing Europe needs is to force the aftereffect of a plunge in systemic confidence to be imposed upon the market participants! And yet, it is doing just that.

And for a comparable virtualization of repo pathways in the US, here is a chart showing the key relationships as of 2009. For the modern iteration, just update $30 trillion with $80 trillion (including custodial "assets" State Street, BoNY and JPM). This is $80 trillion in custodial credit money created via repo. Just in the US.

In other words, just as we have been warning for the past four years, Europe may pull the switch on its own electric chair. Among others, read:

Finally, read Kyle Bass' own thoughts on the matter: Presenting Kyle Bass' Analysis On Shortening Collateral Chains; Or The Gradual Evisceration Of Shadow Banking

Hayman Capital Letter Dec 14


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q99x2's picture

The disruption comes at the start of one of the year's busiest travel periods as people head abroad for the Bank Holiday weekend.

Precious's picture

Shadow politicians take down shadow bankers.  That plot's enough to make Dan Brown weep.

Jayda1850's picture

titled: "The inverted pyramid"

Fukushima Sam's picture

I'm sure everything's just fine over in the global shadow banking economy.

NotApplicable's picture

I take it that "collapsing collateral chains" are the new "cascading cross defaults?"

This should end well.

BigJim's picture

 The result of this, should it be taken to completion, would be pervasive liquidations as countless collateral chain margin calls spread, counterparty risk soars all over again, and as the scramble to obtain the true underlying assets finally begins.

ie, it won't happen. But the threat of it will unleash another round of banker backhanders to politicians. 

Precious's picture

It would be happening faster but the shadow politicians aren't finished moving their own money to off-shore tax havens yet.

Manthong's picture

80 trillion here, 80 trillion there..

Pretty soon you are talking about real hypothecations of promises of incumbrances of pledges of credit that can never be called to default..

BLOTTO's picture

80 Trillion...$?

We are now starting to talk in large numbers used to measure distances between planets, stars, nebula's and shit...


Might as well use Au - Astronomical Units.

Manthong's picture

Au= AU.. it will come to pass.


oh.. but quads in yen

BLOTTO's picture

There i go thinking about Gold again i

Thanx Mant

SafelyGraze's picture


Element's picture

At least it's not serious, I was getting a bit worried 'til I realized none of the numbers were real, come to think of it nor are they even possible ... whew! ... all better I suppose.

eatthebanksters's picture

This means the TBTF banks can no longer profit off of casino bets, right?  This means they have no more high margin business right? This means that they can't operate as huge, fat, bloated bureaucracies for the benefit of a few fat cats at th top right?  It basciallymeans TBTF is no longer corect...they will fail.  I'm down!

kaiserhoff's picture

Hell's the problem?  I'm sure they can pull 80 trillion in good collateral out of some goat's ass in Iberia.  Go for it, suckers.  Let's drop the big one and see what happens.

Dead Canary's picture

Just when I got used to the fact that we live in a house of cards, I find out it's built in a swamp, over a fault line.
And the swamp is full of werewolves and cyber-gators.

If our financial system is stuffed with re-hypothecated, multi-pledged collateral, (Think MF Global) a few rules now attempting to bring order to this mess is a case of way to little, waaay  to late.
Katy, bar the door.

Urban Redneck's picture

It would be one of the early stages, unless the radiation from Tokyo can't be contained

Swarmee's picture

Clever double meaning, I like it. Of course as you likely know one AU is "only" approx 93 million miles, so even $80 trillion represented in AU (where $1 = 1 mile) would be 860,215 AU! Holy hell the distance from here to the nearst star, Proxima Centauri is just 271,000 AU!

The mind boggles. How did we ever let these people create so much debt?

resurger's picture

you are damn fucking right BLOTTO!

Sometimes i feel 80 Trillion is not a big number ....

MonsterBox's picture

a stack of one million dollar bills = 333 feet tall

a stack of one billion dollar bills = 63 miles tall

same stack of a trillion dollar bills = 8.5 planet diameters

Can any one really get their head around the size of a TRILLION?!?

James_Cole's picture

$8 x 10^13, totally manageable lol

Total outstanding according ot zh, $3 x10^14

9.4 x10^15 - lightyear. Soon we'll be able to compare derivatives relative to light years. 

Big numbers, Bernanke is gonna need a spaceship instead of a helicopter. 

Manthong's picture

trillions?? that is so.. double ought thinking..

quads is the new trillions in the teens.

Panafrican Funktron Robot's picture

There must be some reason for these intentional crash mechanisms coming into view (this, one day after the China copper article is posted).  I was initially thinking the banksters would be pissed about this, but intentional crashes often serve very useful purposes.

mkkby's picture

WTF is wrong with you people.  The article says europe "MAY CONSIDER".  It will... NEVER HAPPEN.  Just like honest mark to market accounting will never happen.

Hit the snooze button sheeple.  This is nothing.

BigJim's picture

 Ms Lagarde’s lawyer, Yves Repiquet, said the inquiry was ‘in no way incompatible’ with her new job...

Haha, understatement of the year! 

Manthong's picture

Um .. maybe she has spent a little too much time on the tanning bed or getting injections at Wolf Richter’s place.
but we do know that she has a little bag..  so WTF?

new game's picture

yup, the sly silver fox.  those pelts bring a premium, don't cha know.

Doña K's picture

She learnt her tricks during her early days in Chicago.

Manthong's picture

ah yes.. Chicago..

Where the popularized concept of "never let a serious crisis go to waste" emanates from nowadays.

Thank God the murder capitol home of gun control is run by such enlightened persons.

shovelhead's picture

That gal is gonna be swimming to Cambodia soon.

worldtraveler's picture

Is it not just similar as when the Dem's blame Bush for all the mess that Obama has perpetuated and also newly created? Hollande's totally inept government tries to drag their predecessor and his team into the dirt - it's typical french bullshit. Same as starting a war with a foreign country to herd and distract the sheeple.

Spigot's picture

Problem is that simply the discussion of "collapsing the chain" of re-hypothication by those who just keel hauled Cyprus and Irish depositors ... by itself will cause a stampede. Only the first oines to collapse their own chain and draw back the collateral will be able to do so, all the remaining bag holders will only have air to grasp at as their fall down the slope.

This is fucking hugh. Good Gawd!

kaiserhoff's picture

Haven't heard "keel hauled" in a while.

Would be a great way to encourage confessions from the bankster set.

bonin006's picture

Probably because water boarding is more controllable, and easier to hide.

robertocarlos's picture

Keel hauled is just going from one side of the boat to the other side of the boat. No big deal. Maybe they are serving coffee on the other side.

Spigot's picture

Indeed, the former "depositors" were bound, gagged, and dragged over to the "share holder" side of the boat...

Mesquite's picture

And about time..........

astoriajoe's picture

OT: Does anyone have a photo of some guy smoking at an oil refinery?

Or perhaps a long-tailed cat at a mousetrap factory?


Handful of Dust's picture

Does this mean they cannot 'repledge' their house to five different banks for  5 separate $400k loans?



max2205's picture

Watch those yankee bonds blow up. Ben wilk have to cover that too

_ConanTheLibertarian_'s picture

That was kind of my first thought. This sounds like cannibalism.

insanelysane's picture

People are starting to ask questions.