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The primary effects of a shadow Banking resurgence | Banking Insight

Lest you wonder why, however, it was Ben. Ben Bernanke in an Easter Monday meeting in Atlanta, veered the audience at the Dome and throughout the world from more wayward QE3 attempts to a focus on the shadow banking system and the world followed. and though we do niot have  36″X48″ poster to share from the Fed report in 2010, we have mostly applaudedd the liquid markets in securities such as MBS and any repo transactions. We have also seen how money market funds overdid themselves in funding Europe and how their withdrawal was a primary ignition for the euro zone crisis pre LTRO in October / November 2011

In a speech that did not touch directly on the outlook for economic growth or monetary policy, Bernanke focused on the lingering blind spots for financial authorities trying to prevent a repeat of the 2008-2009 meltdown.

He said financial stability matters had historically played second fiddle to monetary policy issues in the list of central bank priorities, but the crisis changed that.(moneycontrol/Reuters)

Funnily Wall Street was mostly also part of the shadow banking system that could be loosely defined as all non depositary institutions with no access to Fed liquidity or Deposit insrance and are still a large mutiple of the traditional banking system led by the monyey market funds themselves and apparently there is no easy way to identify themselves a s SIFI and manage a new Capital regime that covers them esp for the swathe of erstwhile off balance sheet assets  erffectively used by banks to blow up leverage before new stress tests and leverage Caps were combined with Financial Stability ratios to lend a semblance of discipline to the shadow banking system

A simple 2010 report from the Fed on Shadow banking underlines the US approach to the global systemic problem posed by money funds and insurance companies running amok with surplus funds in hundreds of Trillions leveraged to an oversized bubble and ahow any change in its structure maay have obvious repercussions. The complete document here

The rapid growth of the market-based financial system since the mid-1980s changed the
nature of financial intermediation in the United States profoundly. Within the market-based
financial system, “shadow banks” are particularly important institutions.

Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without
access to central bank liquidity or public sector credit guarantees. Examples of shadow banks
include finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose
finance companies, structured investment vehicles, credit hedge funds, money market mutual
funds, securities lenders, and government-sponsored enterprises.

Shadow banks are interconnected along a vertically integrated, long intermediation chain,
which intermediates credit through a wide range of securitization and secured funding
techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo.
This intermediation chain binds shadow banks into a network, which is the shadow banking
system.

The shadow banking system rivals the traditional banking system in the
intermediation of credit to households and businesses. Over the past decade, the shadow
banking system provided sources of inexpensive funding for credit by converting opaque,
risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity
and credit transformation in the shadow banking system thus contributed significantly to asset
bubbles in residential and commercial real estate markets prior to the financial crisis.

We document that the shadow banking system became severely strained during the
financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and
liquidity transformation, but unlike traditional financial intermediaries, they lack access to
public sources of liquidity, such as the Federal Reserve’s discount window, or public sources
of insurance, such as federal deposit insurance.

The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes

were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively,

provided either a backstop to credit intermediation by the shadow banking system or to traditional

banks for the exposure to shadow banks. Our paper documents the institutional features of shadow banks, discusses
their economic roles, and analyzes their relation to the traditional banking system.

Key words: shadow banking, financial intermediation

 

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This entry was posted on April 10, 2012 by in Amitonomics, Banking, Financial Services, Global, US.

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