In our paper, Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09, forthcoming in the IMF Economic Review, we provide evidence that global imbalances cannot explain the geography of the financial crisis of 2007-09. In particular, they cannot explain why surplus countries such as Germany and their banks were as heavily involved as the US banks in the business of creating risk-free securities and concentrating risks in the process.

The global imbalance explanation of the financial crisis of 2007-09 argues that the demand for riskless assets from countries with current account surpluses created fragility in the US financial sector. We investigate this explanation by analyzing whether this fragility only appeared in countries that had current account surpluses, such as the US, or also in other countries. Specifically, we examine the geography of asset-backed commercial paper (ABCP) conduits set up by large commercial banks. We show that both banks located in surplus countries and banks located in deficit countries manufactured riskless assets of $1.2 trillion by selling short-term asset-backed commercial paper to risk-averse investors, predominantly US money market funds, and investing the proceeds primarily in long term US assets. As negative information about US assets became apparent in August 2007, banks in both surplus and deficit countries experienced difficulties rolling over asset-backed commercial paper and as a result suffered significant losses.

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