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The shadow banking system: implications for financial regulation


  • Tobias Adrian
  • Hyun Song Shin


The current financial crisis has highlighted the growing importance of the "shadow banking system," which grew out 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 it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to "leverage up" by buying one another's securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.

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  • Tobias Adrian & Hyun Song Shin, 2009. "The shadow banking system: implications for financial regulation," Staff Reports 382, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:382

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    References listed on IDEAS

    1. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 111-142.
    2. Sumner Scott, 2009. "Comment on Brad Delong: Can We Generate Controlled Reflation in a Liquidity Trap?," The Economists' Voice, De Gruyter, vol. 6(4), pages 1-2, March.
    3. Dasgupta Swapan, 2009. "Comment on Luigi Zingales: Why not Consider Maximum Reserve Ratios?," The Economists' Voice, De Gruyter, vol. 6(4), pages 1-2, March.
    4. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 235-263.
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    Banks and banking ; Capital market ; Financial leverage ; International finance;

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