Role of shadow banks
Key Takeaways The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
Advantages of shadow banking
Woods  in the U. Compliance procedures and reports which cost millions of dollars as well as disruption of operations are no longer required. Maurin, Vincent. Indeed, the asset management industry is playing an increasingly important role in direct lending. However, competitive pressures force banks to undertake more risks and if possible earn a higher rate on their investments. What is important is that not only commercial banks can conduct credit expansion, but also non-bank financial institutions, such as shadow banks. These investments can be made by raising money from other institutions. Meeks, Roland, Benjamin D. This is because the shadow banking system provides a free pass to the banks to circumvent any regulation. Hannoun   At least one financial regulatory expert has said that regulated banking organizations are the largest shadow banks.
If well structured and supported by appropriate policy measures, the shadow banking system can support a variety of investor and corporate needs and enhance the efficient functioning of capital markets. More than a third of the private credit markets thus became unavailable as a source of funds.
Shadow banking regulation
Despite the higher level of scrutiny of shadow banking institutions in the wake of the financial crisis, the sector has grown significantly. Singh, Manmohan and James Aitkien. Integrating these two explanations, in this article we develop a disaggregated view of the shadow banking system. Additionally, alternative asset managers are engaging in direct loan provision to borrowers traditionally serviced by banks. Similarly, at each round of shadow bank lending, the ratio of loans to collateral increases, at a diminishing rate, based on the haircut. Demands for settlement of hundreds of billions of dollars of credit default swaps contracts issued by AIG , the largest insurance company in the world, led to its financial collapse. Key Takeaways The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking. Indeed, the asset management industry is playing an increasingly important role in direct lending.
Therefore, other banks which are holding such assets also have to mark down their balance sheet. Shostak, Frank.
A lot of these shadow banks are implicitly or explicitly backed by commercial banks and therefore command the sort of confidence that is required to sell securities in the government markets. This is because they can create liquid IOUs that function as near monies and are used as collateral against credit.
However, the key is here to notice that in the contemporary economies there are many money-like assets and distinct forms of money for different economic agents. Therefore, if a company were to set up a money market fund and sell short term securities and use the proceeds to make long term loans, they would effectively be conducting banking.
The United States and the European Union are already considering rules to increase regulation of areas like securitisation and money market funds, although the need for money market fund reforms has been questioned in the United States in light of reforms adopted by the Securities and Exchange Commission in Gabor, Daniela and Jakob Vestergaard.
Shadow banking examples
Feinman, Joshua N. The two most important functions of shadow banking are securitization and collateral-intermediation. It is true that commercial banks indirectly back these shadow banking institutions. However, the regulatory arbitrage is not the only motive for securitization. On the other hand, it may be argued that shadow banks can, in a way, smooth the business cycle because they often expand credit when traditional banks contract it Meeks et al. Thus, banks might take advantage of their information and securitize loans of lower quality. Auburn Ala. Instead, they rely on short-term funding provided either by asset-backed commercial paper or by the repo market, in which borrowers in substance offer collateral as security against a cash loan, through the mechanism of selling the security to a lender and agreeing to repurchase it at an agreed time in the future for an agreed price. Therefore, other banks which are holding such assets also have to mark down their balance sheet.
based on 107 review