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The Changing Nature of Financial Intermediation and the Financial Crisis of 2007–2009

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Author Info

  • Tobias Adrian
  • Hyun Song Shin

    ()
    (Federal Reserve Bank of New York, New York, NY 10045
    Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08540–5290)

Abstract

The current financial crisis has highlighted the changing role of financial institutions and the growing importance of the shadow banking system, which grew on the back of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States but has had a profound influence on the global financial system as a whole. In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are closely tied to the fluctuations in leverage of market-based financial intermediaries. Balance-sheet growth of market-based financial intermediaries provides a window on liquidity in the sense of the availability of credit, whereas financial crises tend to be associated with contractions of balance sheets. We describe the changing nature of financial intermediation in the market-based financial system, chart the course of the recent financial crisis, and outline the policy responses that have been implemented by the Federal Reserve and other central banks to counter it.

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File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.economics.102308.124420
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Bibliographic Info

Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 2 (2010)
Issue (Month): 1 (09)
Pages: 603-618

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Handle: RePEc:anr:reveco:v:2:y:2010:p:603-618

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Related research

Keywords: intermediation chains; procyclicality; liquidity facilities; monetary policy;

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Cited by:
  1. Sousa, João & Sousa, Ricardo M., 2013. "Asset returns under model uncertainty: evidence from the euro area, the U.S. and the U.K," Working Paper Series 1575, European Central Bank.
  2. Solomon Sorin & Golo Natasa, 2013. "Minsky Financial Instability, Interscale Feedback, Percolation and Marshall–Walras Disequilibrium," Accounting, Economics, and Law, De Gruyter, vol. 3(3), pages 167-260, October.
  3. Agarwal, Manmohan & Walsh, Sean & Wang, Jing & Whalley, John & Yan, Chen, 2013. "Expected worsening or improving financial instability and the 2008 financial crisis," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 92-105.
  4. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.
  5. João Sousa & Ricardo M. Sousa, 2011. "Asset Returns Under Model Uncertainty: Eveidence from the euro area, the U.K and the U.S," NIPE Working Papers 21/2011, NIPE - Universidade do Minho.

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