The securities in asset-backed commercial paper (ABCP) conduits serve as collateral for the issuance of asset-backed commercial paper, while repo conduits fund in the repo market. Most conduits are so-called single-seller conduits that only serve individual banks or finance companies. Multi-seller conduits provide funding for asset pools of multiple institutions. Conduits are backed by credit lines from commercial banks, which allow the conduits to have a credit rating. Asset-backed commercial paper conduits are also defined in “Shadow Banking: A Review of the Literature”. Federal Reserve Bank of New York Staff Reports, no. 580, (October) 2011. www.newyorkfed.org/research/staff_reports/sr580.pdf. 2  BIS central bankers’ speeches  Because the boom years resulted in strong earnings, low price volatility and few credit losses, firms were able to operate at extreme levels of leverage. When the housing bubble started to deflate, the vulnerabilities of this type of business model soon became apparent. Heavy reliance on short-term wholesale funding exposed the system to a series of intertwined downward spirals in asset and funding markets. This spread in waves, beginning in the market for asset-backed commercial paper (ABCP) issued by off-balance-sheet conduits, and spreading via auction-rate securities, to the repo, money market and financial commercial paper markets that formed the core financing for market-based financial intermediation. Initial declines in asset prices forced leveraged holders with maturity mismatches to sell assets. This increased price volatility and reduced the value of the assets that collateralized other firms’ borrowings.
Simulations by Banco de España staff show that, under plausible assumptions, the deleveraging process of the public sector towards levels considered safer will be very gradual in Spain, and in developed economies in general, possibly taking up to several decades to reach the reference value of the 60% debt-to-GDP ratio. Therefore, continuing with the ongoing fiscal consolidation process to ensure exit from the Excessive Deficit Procedure (EDP) must be a priority. The Spanish Public Administration has been subject to this procedure since 2009, under the corrective arm of the Stability and Growth Pact (SGP). In 2016, the EU Council updated the conditions under which the EDP exit would take place, and set 2018 as a deadline. In particular, the Council requires the public deficit to reach 2.2% of GDP this year and to achieve an accumulated structural effort over the period 2016-2018 of 0.6 pp of GDP. While it is very likely that the General Government deficit will be below 3% in 2018, achieving the required structural effort will call for further fiscal adjustments. In fact, according to the European Commission, the structural component of the public deficit in Spain is still very high, at around 3 % of GDP this year, in fact, the largest of the euro area members. In addition, public finances will have to face the challenge posed by ageing population.