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The Interconnections Between the Shadow Banking System and the Regular Banking System. Evidence from the Euro Area

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  • Jeffers, E.
  • Baicu, C.
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    Abstract

    One of the most important lessons of the global financial crisis has been the deep interconnectedness between the shadow banking system and the regular banking system. These two systems are linked through several channels, of which one of the most important is the financing provided by regular banks to the shadow banking system and vice versa. In addition, regular banks can originate loans that are securitized. Subsequently, part of the securitized instruments may remain on the balance sheet of the originating banks or be found on the balance sheet of other regular banks and shadow banking entities. These links between the two systems can increase contagion and systemic risks, which in turn may affect financial stability. The financial crisis has acutely revealed the negative effects these interconnections can generate. The interconnections are underestimated by the available data because of the difficulties in gathering information on the euro area. Within this context, our paper tries to evaluate and analyze the interconnections between the shadow banking system and the regular banking system within the euro area, both in the pre-crisis period and currently. Finally, some measures to regulate the interconnections between these two systems are raised.

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    File URL: http://openaccess.city.ac.uk/2119/1/CITYPERC%2DWPS%2D2013_07.pdf
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    Bibliographic Info

    Paper provided by Department of International Politics, City University London in its series CITYPERC Working Paper Series with number 2013-07.

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    Date of creation: 2013
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    Handle: RePEc:dip:dpaper:2013-07

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    Postal: Department of International Politics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, United Kingdom
    Phone: +44 (0)20 7040 8500
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    Web page: http://www.city.ac.uk/arts-social-sciences/international-politics/
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    Keywords: shadow banking; traditional banking; the European banking system;

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    1. Bakk-Simon, Klára & Borgioli, Stefano & Giron, Celestino & Hempell, Hannah Sabine & Maddaloni, Angela & Recine, Fabio & Rosati, Simonetta, 2012. "Shadow banking in the Euro area: an overview," Occasional Paper Series 133, European Central Bank.
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