This paper examines the sizable role of rehypothecation in the shadow
banking system. Rehypothecation is the practice that allows collateral
posted by, say, a hedge fund to its prime broker to be used again as
collateral by that prime broker for its own funding. In the United
Kingdom, such use of a customer’s assets by a prime broker can be for an
unlimited amount of the customer’s assets while in the United States
rehypothecation is capped. Incorporating estimates for rehypothecation
(and the associated re-use of collateral) in the recent crisis indicates
that the collapse in non-bank funding to banks was sizable. We show
that the shadow banking system was at least 50 percent bigger than
documented so far. We also provide estimates from the hedge fund
industry for the – churning – factor or re-use of collateral. From a
policy angle, supervisors of large banks that report on a global
consolidated basis may need to enhance their understanding of the
off-balance sheet funding that these banks receive via rehypothecation
from other jurisdictions.