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Lifting the Veil: Regulation and Shadow Banking

  • Christian Calmes

    (Université du Québec en Outaouais)

  • Raymond Theoret

    (Université du Québec en Outaouais)

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.

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Paper provided by C.D. Howe Institute in its series e-briefs with number 110.

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Length: 7 pages
Date of creation: Jan 2011
Date of revision:
Publication status: Published on the C.D. Howe Institute website January 2011
Handle: RePEc:cdh:ebrief:110
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  1. 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.
  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. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
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