Shallow banking

The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal financial regulations. Former US Federal Reserve Chair Ben Bernanke provided the following definition in November 2013:

“Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions — but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper [ABCP] conduits, money market funds, markets for repurchase agreements, investment banks, and mortgage companies”

Shadow banking has grown in importance to rival traditional depository banking, and was a primary factor in the subprime mortgage crisis of 2007-2008 and the global recession that followed. Valerio Lemma, an associate professor of Banking Law who consults on regulatory compliance, argues that the lack of regulatory supervision of the shadow banking system is a market failure.

The entities that form the shadow banking are disputed in literature. Between that there are other financial corporations but they could be considered other type of companies.

The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions - but it has been common practice for investment banks to conduct many of their transactions in ways that do not show up on their conventional balance sheet accounting and so are not visible to regulators or unsophisticated investors.

The term Shadow banking is strongly related with the Great Recession which started in 2008. Prior to the 2008 financial crisis, major investment banks were subject to considerably less stringent regulation than depository banks. In 2008, investment banks Morgan Stanley and Goldman Sachs became bank holding companies, Merrill Lynch and Bear Stearns were acquired by bank holding companies, and Lehman Brothers declared bankruptcy, essentially bringing the largest investment banks into the regulated depository sphere.

See also

Papers

• Bryan Noeth & Rajdeep Sengupta (2011). “Is Shadow Banking Really Banking?”. The Regional Economist, Federal Reserve Bank of St. Louis. October: 8-13.
• Pozsar, Z., Adrian, T., Ashcraft, A. B., & Boesky, H. (2010). Shadow banking. Available at SSRN 1640545.
• Gorton, G., & Metrick, A. (2010). Regulating the shadow banking system. Brookings Papers on Economic Activity, 2010(2), 261-297.
• Gennaioli, N., Shleifer, A., & Vishny, R. W. (2013). A model of shadow banking. The Journal of Finance, 68(4), 1331-1363.

Books

• Adrian, T. (2010). Shadow Banking System: Implications for Financial Regulation. DIANE Publishing.
• Claessens, S., Ratnovski, L., & Singh, M. M. (2012). Shadow banking: economics and policy (No. 12). International Monetary Fund.