Appendix 5 — Independent Specialists — FHCs’ and DBDs’ Reliance on Them (Tail-Risk Absorption)

Appendix 5. The “internal” and “external” shadow-banking sub-systems are symbiotic. Independent specialists (LPFCs, securities lenders) fund banks and broker-dealers by buying their term debt, while credit-risk repositories absorb tail risk by “wrapping” assets: mortgage insurers wrap unsecuritized pools, monoline insurers wrap ABS, and diversified insurers / AIG-FP sell CDS on ABS CDOs — turning risky assets into AAA collateral for repo and ABCP funding.