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Lifting the Veil: Regulation and Shadow Banking

Author

Listed:
  • Christian Calmes

    (Université du Québec en Outaouais)

  • Raymond Theoret

    (Université du Québec en Outaouais)

Abstract

The growth of shadow banking in recent decades has changed the concept of banking. It has meant less deposit-taking and lending and more market-oriented banking activities, including in particular a growing trade in securitized products. However, shadow banking is opaque; a problem that was underlined in the recent financial crisis. Does the experience of the financial crisis and its links to the riskiness of banking mean bank re-regulation is necessary? In the Canadian context at least, better reporting of bank risk seems to be a more appropriate way than re-regulation to prevent financial turmoil from arising in this area. Market-oriented operations should be more exposed to daylight, to enable a better evaluation of true bank risk, and regulatory agencies should require detailed reports on activities generating noninterest income. Better indicators of leverage need also to be developed, owing to leverage’s role as the principal channel of bank risk-taking.

Suggested Citation

  • Christian Calmes & Raymond Theoret, 2011. "Lifting the Veil: Regulation and Shadow Banking," e-briefs 110, C.D. Howe Institute.
    • Handle: RePEc:cdh:ebrief:110
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    File URL: https://www.cdhowe.org/public-policy-research/lifting-veil-regulation-and-shadow-banking
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    References listed on IDEAS

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    1. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230, National Bureau of Economic Research, Inc.
    2. 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.
    3. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    4. Rocco Huang & Mr. Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 2009/152, International Monetary Fund.
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    Cited by:

    1. Steve E. Hrudey, 2011. "Safe Drinking Water Policy for Canada - Turning Hindsight into Foresight," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 323, February.
    2. Colin Busby & William B.P. Robson, 2011. "A Social Insurance Model for Pharmacare: Ontario's Options for a More Sustainable, Cost-Effective Drug Program," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 326, April.
    3. David A. Dodge & Richard Dion, 2011. "Chronic Healthcare Spending Disease: A Macro Diagnosis and Prognosis," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 327, April.
    4. Christopher Ragan, 2011. "Precision Targeting: The Economics – and Politics – of Improving Canada’s Inflation-Targeting Framework," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 321, February.
    5. James P. Bruce, 2011. "Protecting Groundwater: The Invisible and Vital Resource," C.D. Howe Institute Backgrounder, C.D. Howe Institute, issue 136, February.
    6. Philippe Bergevin & William B.P. Robson, 2011. "The Costs of Inflexible Indexing: Avoiding the Adverse Fiscal Impacts of Lower Inflation," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 322, February.
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    12. Alexandre Laurin & William B.P. Robson, 2011. "A Faster Track to Fiscal Balance: The 2011 Shadow Budget," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 320, February.

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    More about this item

    Keywords

    Financial Services; shadow banking system; Canadian banking system; regulation; subprime mortgage crisis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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