Shadow Banking

The New York Fed ^ | July 2010 | Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky

[unclebankster]

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.

[givemELL]

Could the “shadow banking system network” be an attempted transitional phase to world-wide supranational banking from the existing, but strained and insolvent, central banks of nation-states?

[givemELL]

If the answer is “yes”, the Fed Reserve and the EU have a lot of work to do to correct its (the “shadow banking system network”) overleveraged and entirely uncontrolled functions. Neither US or EU “reforms” of the moment are effectively palliative or curative.

[algernonpj]

For those who have trouble with the link:

http://www.newyorkfed.org/research/staff_reports/sr458.html

Full Report:
http://www.newyorkfed.org/research/staff_reports/sr458.pdf

[Wuli]

The link you provided to the original article did not work.

This link does: http://www.newyorkfed.org/research/staff_reports/sr458.html

[Wuli]

One element about “shadow banking” that is missing from the introduction to the NY Feds paper, an element of large difference between allot of what goes on in “shadow banking” versus “traditional banking” is that in the “shadow banking” universe there is much less public transparency - trillions in purchases and sales of investment instruments that are never “publicly” traded - never bought and sold in a “public market” manner.

I could be wrong, but I think that lack of transparency could be a large factor in the assistance “shadow banking” provides in the creation of bubbles.