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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

Jul 21

Written by: Donald van Deventer
7/21/2011 1:26 AM 

Today’s blog focuses on the U.S. dollar funding shortfall that took place at Bank of New York Mellon (“BNY Mellon”) during the period from February 8, 2008 to March 16, 2009. BNY Mellon navigated the 2007-2009 credit crisis as skillfully as any other U.S. financial institution.  Like State Street, BNY Mellon did incur losses from its fund management business, a source of losses that is surprising to many who would have expected the end investors in those funds to take 100% of any decline in the price of a fund.  Even though BNY Mellon avoided the headlines and major problems very skillfully, on October 15, 2008, BNY Mellon had $41.6 billion in loans outstanding from the Federal Reserve, $13.6 billion more than Lehman was refused by the Fed until Lehman announced it would file for bankruptcy on Sunday, September 14, 2008.

This is the sixteenth Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup, Dexia SA, Depfa Bank plc, Barclays, Goldman Sachs, the combined JPMorgan Chase, Washington Mutual, and Bear Stearns, Wachovia, and State Street.

Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis.  These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century.  This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at BNY Mellon during the credit crisis.

The data used for BNY Mellon in this analysis are described in more detail below. The data consist of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve. 

A detailed chronology of the 2007-2009 credit crisis is given in these two recent blog posts:

van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog,, May 13, 2011.

van Deventer, Donald R. “A Credit Crisis Chronology Part 2 March 2008 Through March 2009: This Time Isn’t Different,” Kamakura blog,, May 14, 2011.

One of the indications of how skillfully BNY Mellon navigated the credit crisis is the fact that the firm is not mentioned even once in this detailed chronology. BNY Mellon did make the headlines a few times, and we summarize those events below. Perhaps most surprisingly, BNY Mellon was upgraded by Standard & Poor’s during the credit crisis, not downgraded. For more details on the credit crisis, we refer readers to the Levin report, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report, Permanent Committee on Investigations (Senator Carl Levin, Chairman), U.S. Senate, April 13, 2011. The SIGTARP report mentioned below is the document entitled “Emergency Capital Injections Provided to Support the Viability of Bank of America, Other Major Banks, and the U.S. Financial System,” Office of the Special Inspector General for the Troubled Asset Relief Program, October 5, 2009.

June 27, 2008
BNY Mellon upgraded from A+ to AA- by Standard & Poor’s (Source: Standard & Poor’s).

September 16, 2008
BNY Mellon’s BNY Institutional Cash Reserves Fund falls below par value to $0.991 on Lehman-related losses (Source: Bloomberg).

October 16, 2008
BNY Mellon earnings down 53% as firm reports securities losses of $162 million and provides $433 million to prop up money market fund values (Source: Forbes).

November 21, 2008
BNY Mellon announces 1,800 job cuts (Source: Associated Press).

October 20, 2009
BNY Mellon posts losses of $2.5 billion in the third quarter (Source: New York Times).

This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to BNY Mellon during the period February 8, 2008 to March 16, 2009. BNY Mellon’s borrowings from the Federal Reserve can be summarized as follows:

Borrowing dates:
First borrowing September 22, 2008 for $9.1 billion, with stable borrowings thereafter, except for a large one day $31.96 billion spike in borrowings on October 15, 2008. Borrowings were continually outstanding until March 12, 2009.
Average from

2/8/2008 to 3/16/2009
$2.5 billion
Average when Drawn
$5.9 billion
Maximum Drawn
$41.6 billion on October 15, 2008
Number of Days with

Outstanding Borrowings
171 days

The graph below shows the one month and one year default probabilities for the BNY Mellon from Kamakura Risk Information Services version 5.0 Jarrow-Chava reduced form credit model. Default probabilities rose steadily from March 2008 with jumps in October 2008 and January-February 2009, but they remained well below the levels of many of BNY Mellon’s peer banks:

Cumulative default risk is shown below for BNY Mellon on October 15, 2008, the day of its peak borrowing from the Federal Reserve. BNY Mellon’s 5 year cumulative default risk was 1.43% and its 10 year cumulative default risk was 2.34%.

The graph below shows the wave of borrowings that began on September 22, 2008 and peaked at $41.6 billion on October 15, 2008 due to a new one day borrowing of $31.96 billion. BNY Mellon received $3 billion in capital under the Capital Purchase Program of the Troubled Asset Relief Program on October 28, 2008 according to the SIGTARP Report.  With the exception of the one day spike in borrowings on October 15, 2008, BNY Mellon showed a more stable pattern in its borrowings than most of the other firms reviewed in this series so far.

In the chart below, we compare BNY Mellon’s consolidated funding short fall to those firms whose liquidity risk we have previously analyzed in this series.  BNY Mellon’s consolidated funding shortfall, measured by average drawn borrowing of $5.88 billion, ranks thirteenth among the firms analyzed in this series to date.

If one ranks the same firms by largest outstanding borrowing on a single day, BNY Mellon ranks ninth, with a peak borrowing of $41.6 billion, $13.6 billion more than the $28 billion post-bankruptcy borrowing of Lehman Brothers:

Borrowings During the Bear Stearns Crisis, March 14, 2008 to May 31, 2008

If we focus on the period from March 15 (one day prior to the JPMorgan Chase absorption of Bear Stearns) to May 31, 2008, BNY Mellon was unique among the firms analyzed so far. The bank did not borrow from the Fed during this period.

Borrowings from the Commercial Paper Funding Facility

The Federal Reserve’s disclosure of borrowings under the Commercial Paper Funding Facility lists no transactions in which BNY Mellon is listed as “parent/sponsor at time of purchase.”

Implications of Funding Shortfall Data

BNY Mellon managed through the credit crisis with exceptional skill.  Nonetheless, we find once again that BNY Mellon borrowed $13.6 billion more, a maximum of $41.6 billion, than the $28 billion which was refused to Lehman Brothers until that firm declared bankruptcy.  This confirms once again that the definition of “too big to fail” was dramatically revised immediately after Lehman’s demise, since BNY Mellon’s peak borrowing was on October 15, 2008, only 31 days after Lehman’s September 14 bankruptcy announcement.

Background on the Federal Reserve Data

A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:

Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed.  This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above.  These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.

Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:

  • From Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
  • Kamakura converted each report to spreadsheet form
  • These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
  • Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
  • To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.

For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at  Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.

Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
July 21, 2011

© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.