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The shadow banking system: implications for fi nancial regulation

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  • Adrian, T.
  • Shin, H S.

Abstract

The current financial crisis has highlighted the changing role of financial institutions and the growing importance of the “shadow banking system” that grew on the back of the securitisation 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 for 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 of leverage of market-based fi nancial intermediaries. Balance sheet growth of market-based financial intermediaries provides a window on liquidity in the sense of availability of credit, while contractions of balance sheets have tended to precede the onset of financial crises. Securitisation was intended as a way to disperse credit risk to those who were better able to absorb losses, but instead securitisation served to increase the fragility of the financial system as a whole by allowing banks and other intermediaries to leverage up by buying each others’ securities. In the new, post-crisis financial system, the role of securitisation is likely to be held in check by more stringent financial regulation and the recognition of the importance of preventing excessive leverage and maturity mismatch in undermining financial stability.

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Bibliographic Info

Article provided by Banque de France in its journal Financial stability review.

Volume (Year): (2009)
Issue (Month): 13 (September)
Pages: 1-10

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Handle: RePEc:bfr:fisrev:2009:13:1

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Cited by:
  1. Christian Calmès & Raymond Théoret, 2009. "Off-Balance-Sheet Activities and the Shadow Banking System: An Application of the Hausman Test with Higher Moments Instruments," RePAd Working Paper Series UQO-DSA-wp042009, Département des sciences administratives, UQO.
  2. Edward Nelson, 2011. "Friedman's monetary economics in practice," Finance and Economics Discussion Series 2011-26, Board of Governors of the Federal Reserve System (U.S.).
  3. Duca, John V., 2010. "Did the Commercial Paper Funding Facility Prevent a Great Depression Style Money Market Meltdown?," MPRA Paper 29255, University Library of Munich, Germany, revised 22 Feb 2011.
  4. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
  5. Thorvald Grung-Moe, 2014. "Shadow Banking: Policy Challenges for Central Banks," Economics Working Paper Archive wp_802, Levy Economics Institute.
  6. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
  7. Sudipto Bhattacharya & Georgy Chabakauri & Kjell G. Nyborg, 2011. "Securitized lending, asymmetric information, and financial crisis," LSE Research Online Documents on Economics 43166, London School of Economics and Political Science, LSE Library.
  8. Tobias Adrian & Adam B. Ashcraft, 2012. "Shadow banking: a review of the literature," Staff Reports 580, Federal Reserve Bank of New York.
  9. Calmès, Christian & Théoret, Raymond, 2010. "The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1719-1728, July.
  10. Cabral, Ricardo, 2013. "A perspective on the symptoms and causes of the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 103-117.
  11. Rötheli, Tobias F., 2010. "Causes of the financial crisis: Risk misperception, policy mistakes, and banks' bounded rationality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 39(2), pages 119-126, April.
  12. Calmès, Christian & Théoret, Raymond, 2014. "Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 388-402.
  13. Richard Herring & Edward J. Kane, 2010. "Rating "Agencies": How Regulation Might Help," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 8(1), pages 14-23, 04.

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