Skip to main content
SpringerLink
Log in
Book cover

The Handbook of Global Shadow Banking, Volume I pp 303–333Cite as

Palgrave Macmillan

The Policy Train Chasing Shadow Banking

  • Chapter
  • First Online:

  • 455 Accesses

Abstract

This chapter takes a step back and asks the question what happened when the dust settled after the financial crisis of 2007–2009. There was time for analysis and reflection. But then it was time to take action based on those findings and experiences. But where to start in a complex domain with many issues that require attention? And does dealing with the 2007–2009 issues solve the deeper root-cause problems? If we don’t want to go down the road of fixing the symptoms, what are then the underlying objectives? Financial stability, liquidity, risk neutralization, keep credit flowing at all times and so on. And what are the best tools to achieve those objectives? Ex ante regulation is needed but inherently insufficient; ex post regulation is to ensure that things are cleaned up as soon as possible and markets don’t stay instable longer then absolutely needed. And how does regulation relate to macroprudential and monetary policies that carry the same objective? And can supervision and stress testing contribute to those joint objectives? An analysis of what happened and the decisions made in the financial industry and the different shadow banking segments is the subject of this chapter.

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   79.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   99.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   139.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

    An excellent summary and schematic overview can be found here: Bankenverband, (2014), Regulation of Shadow Banking. A Guide by the Association of German Banks, January, Berlin.

  2. 2.

    See in detail: FSB, (2013), Strengthening Oversight and Regulation of Shadow banking. An Overview of Policy Recommendations, 29 August.

  3. 3.

    See, for example, FSB, (2013), Strengthening Regulation and Oversight of Shadow Banking, Public Framework for Addressing Shadow Banking Risk in Securities Lending and Repos, p. i.

  4. 4.

    BIS, (2013), Capital Requirements for Banks’ Equity Investments in Funds, June-Consultation document.

  5. 5.

    BIS, (2013a), Capital Requirements for Banks’ Equity Investments in Funds, December. These standards have later on been fully implemented into the consolidated Basel Framework. See bis.org for further details.

  6. 6.

    BIS, (2013a), Ibid. p. 1.

  7. 7.

    The second consultative document was issued in October 2013: BIS, (2013), Fundamental Review of the Trading Book: A Revised Market Risk Framework, Basel, October. To be read preferably in conjunction with BCBS, (2019), Minimal Capital Requirements for Market Risk, January 14, 2019. These standards have also been fully integrated in the Consolidated Basel Framework. See also BCBS, (2015), Fundamental Review of the Trading Book- Interim Impact Analysis, November.

  8. 8.

    Included as paragraph 80 in the Basel III rulebook.

  9. 9.

    See in detail: BIS, (2013a), Ibid. pp. 2–6.

  10. 10.

    See BIS, (2013), Fundamental Review of the Trading Book: A Revised Market Risk Framework, Basel, October, pp. 5–6.

  11. 11.

    The following examples are adjusted from BIS, (2013a), pp. 8–10.

  12. 12.

    For a short write-up on the issue, see BIS, (2018), The Treatment of Large Exposures in the Basel Capital Standards, Executive Summary, April 30, via bis.org

  13. 13.

    The first Basel Committee guidance on this topic, measuring and controlling large credit exposures, was published in January 1991 in an attempt to increase convergence in the supervision of large exposures while recognizing the scope for variation according to local conditions. This best practice for bank supervisors in the monitoring and controlling of large credit exposures was developed in the context of the rules included in Basel I. They related to numerical limits as a percentage of Basel I capital, the definition of which has been subsequently revised in later vintages of the Basel capital framework and more recently and substantively in Basel III; BIS, (2013b), Ibid. p. 1, footnote 2.

  14. 14.

    BIS, (2013b), Supervisory Framework for Measuring and Controlling Large Exposures, March. Finalized April 2014 and later on included in the consolidated Basel Framework, including the findings of the additional consultation round in December 2017. See for details:bis.org.

  15. 15.

    BIS, (2013b), Ibid. p. 1.

  16. 16.

    BIS, (2013b), Ibid. pp. 1–2.

  17. 17.

    BIS, (2013b), Ibid. p. 2.

  18. 18.

    BIS, (2013b), Ibid. pp. 18–27.

  19. 19.

    BIS, (2013b), Ibid. p. 3.

  20. 20.

    BCBS, (2014), Supervisory Framework for Measuring and Controlling Large Exposures, Standards, Basel.

  21. 21.

    Pierre-Etienne Chabanel, (2014), Supervisory Framework for Measuring and Controlling Large Exposures, Moody’s Analytics, August, NY.

  22. 22.

    IOSCO, (2012), Policy Recommendations for Money Market Funds which was based on the IOSCO consultation report (2012), Money Market Fund Systemic Risk Analysis and Reform Options. The report provided a preliminary analysis of the possible risks that money market funds could pose to financial stability and proposed a broad range of possible policy options to address those risks as well as to address other potential issues identified with regard to money market funds.

  23. 23.

    See www.ici.org for recent data.

  24. 24.

    See P. McCabe et al., (2012), The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds, Staff Report, Federal Reserve Bank of New York, Nr. 564, July 2012.

  25. 25.

    IOSCO, (2012), Ibid. p. 5.

  26. 26.

    See US Securities and Exchange Commission (2010), MMF Reform, Final rule, available at http://www.sec.gov/rules/final/2010/ic-29132.pdf. The guidelines were published in May 2010 by the Committee of European Securities Regulators (CESR), ESMA predecessor. The guidelines are available at http://www.esma.europa.eu/system/files/10_049.pdf

  27. 27.

    IOSCO, (2012), Ibid. p. 5.

  28. 28.

    IOSCO, (2012), Ibid. p. 7.

  29. 29.

    See in detail IOSCO, (2012), Ibid. pp. 7–8.

  30. 30.

    See in detail S.A. Brady et al., (2012), The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011, Federal Reserve Bank of Boston.

  31. 31.

    See in detail: IOSCO, (2012), Ibid. pp. 11–18.

  32. 32.

    FSB, (2013), Strengthening Oversight and Regulation of Shadow Banking Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos.

  33. 33.

    See the chapter on securities lending and repos for further details.

  34. 34.

    See the chapter on securities lending and repos for further details.

  35. 35.

    FSB , (2013), Strengthening Oversight and Regulation of Shadow Banking An Overview of Policy Recommendations, p. 6.

  36. 36.

    FSB , (2013a), Strengthening Oversight and Regulation of Shadow Banking Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities, p. 1.

  37. 37.

    FSB, (2013a), Ibid. p. 1.

  38. 38.

    FSB, (2013a), Ibid. p. 2.

  39. 39.

    That is, credit intermediation that involves maturity/liquidity transformation, leverage and/or credit risk transfer. Such credit intermediation activities by non-bank financial entities often generate benefits for the financial system and real economy, for example, by providing alternative financing/funding to the economy and by creating competition in financial markets that may lead to innovation, efficient credit allocation and cost reduction. Ibid. p. 3.

  40. 40.

    See for the full list FSB, (2013a), Annex 1, Ibid. pp. 24–28.

  41. 41.

    See for the full menu FSB, (2013a), Annex 2, Ibid. pp. 29–34.

  42. 42.

    FSB, (2013a), Ibid. p. 6.

  43. 43.

    For example, redemption risks by investors as well as roll-over risk by counterparties.

  44. 44.

    See in details FSB, (2013a), Ibid. pp. 6–7.

  45. 45.

    FSB, (2013a), Ibid. p. 7.

  46. 46.

    FSB, (2013a), Ibid. pp. 7–8.

  47. 47.

    See in detail FSB, (2013a), Ibid. pp. 8–9.

  48. 48.

    See in detail FSB, (2013a), Ibid. pp. 9–10.

  49. 49.

    See in detail FSB, (2013a), Ibid. pp. 10–11.

  50. 50.

    See also: S. Claessens et al. (2012) Shadow Banking: Economics and policy, IMF Staff Discussion Note, and Z. Pozsar et al., (2010), Shadow Banking, Federal Reserve Bank of NY Staff Report Nr. 458, NY.

  51. 51.

    A full review of the policy toolkit can be found in FSB, (2013a), Ibid. pp. 11–22.

  52. 52.

    T. Adrian, (2014), Financial Stability Policies for Shadow Banking, Federal Reserve Bank of New York Staff Reports, Nr. 664 (February). Also in S. Claessens et al. (Eds.), 2015, ‘Shadow Banking Within and Across National Borders,’ World Scientific Studies in International Economics, 40. These themes have come across in earlier literature: T. Adrian, A.B. Ashcraft, (2012), Shadow Banking: A Review of the Literature. Palgrave Dictionary of Economics; T. Adrian, A.B. Ashcraft, N. Cetorelli, (2013), Shadow Bank Monitoring, Oxford Handbook of Banking, Oxford University Press, Oxford.

  53. 53.

    These steps have been discussed before. See also Z. Pozsar, et al., (2013), Shadow Banking, Federal Reserve Bank of New York Economic Policy Review Vol. 19, Issue 2, pp. 1–16.

  54. 54.

    Adrian, (2014), Ibid. p. 2.

  55. 55.

    Pozsar et al., Ibid. (2013).

  56. 56.

    See in detail: V. Acharya, et al., (2013), Securitization without Risk Transfer. Journal of Financial Economics Vol. 107, Issue 3, pp. 515–536. They documented that the majority of guarantees provided by the government were structured as liquidity-enhancing guarantees aimed at minimizing regulatory capital, instead of credit guarantees , and that the majority of ABCP conduits were supported by commercial banks subject to the most stringent capital requirements.

  57. 57.

    See for:

    • The role of the tax advantages of home ownership, the use of debt in mergers and acquisitions by private equity, the use of hybrid debt instruments as capital by financial institutions and the use of tax havens to structure securitization vehicles: J. Alworth, and G. Arachi, (2012), Taxation and the Financial Crisis, Oxford University Press, Oxford.

    • An empirical link between corporate tax rates and the probability of crises: R. de Mooij, et al., (2013), Taxation, Bank Leverage, and Financial Crises. IMF Working Paper Nr. WP/13/48.

    • The severity of crises is larger when pre-crisis leverage is higher, suggesting that tax policy could have effects both on incidence and severity of financial stress. E.P. Davis, M. Stone, (2004), Corporate Structure and Financial Stability. IMF Working Paper Nr. WP/04/124.

  58. 58.

    See R. Rajan, (2005), Has Financial Development Made the World Riskier? Proceedings of the Federal Reserve Bank of Kansas City Economics Symposium: 313–369. This was followed by a string of research, each taking their own angle to the problem: J. Coval, et al., (2009), The Economics of Structured Finance, Journal of Economic Perspectives Vol. 23, Issue 1, pp. 3–25; A. Ashcraft et al., (2011), Credit Ratings and Security Prices in the Subprime MBS Market. American Economic Review Vol. 101, Issue 3, pp. 115–119; N. Gennaioli, (2012), Neglected Risks, Financial Innovation, and Financial Fragility, Journal of Financial Economics Vol. 104, Issue 3, pp. 452–468; N. Gennaioli, et al. (2013), A Model of Shadow Banking, Journal of Finance Vol. 68, Issue 4, pp. 1331–1363. The latter models a world where investors systematically ignore the worst state of the world, generating overinvestment and overpricing during the boom and excessive collapse of real activity and the financial sector during the bust. T.V. Dang, (2009), Opacity and the Optimality of Debt for Liquidity Provision, Yale/MIT Working Paper. Their theory is one of information opacity that can serve as a rationalization of excessive risk taking in the shadow banking system. According to this theory, debt contracts are optimal because they generate opacity. Opacity, in turn, minimizes adverse selection and provides the least possible incentives to collect information. This insight justifies the growth of relatively opaque securitized products in the run-up to the crisis. Relatively little information about the underlying credit quality of these products was known (Adrian, (2014), Ibid. p. 5). They also exacerbate systemic risk once information flows through opaque debt-funded economies.

  59. 59.

    See in detail: A.B. Ashcraft et al., (2008), Understanding the Securitization of Subprime Mortgage Credit, Foundations and Trends in Finance Vol. 2, Issue 3, pp. 191–209.

  60. 60.

    B. Keys et al., (2010), Did Securitization Lead to Lax Screening? Evidence from Subprime Loans, Quarterly Journal of Financial Economics Vol. 125, Issue 1, pp. 307–362.

  61. 61.

    A. Cohen (2011), Rating shopping in the CMBS market. Presented at Regulation of Systemic Risk, Washington, DC, Sep. 15–16; J. Mathis et al., (2009), Rating the Raters: are Reputation Concerns Powerful Enough to Discipline Rating Agencies? Journal of Monetary Economics Vol. 57, Issue 5, pp. 657–674. The authors’ model predicts that a rating agency is likely to issue less accurate ratings in boom times than it would during recessionary periods. H. Xia and G. Strobl, (2012), The Issuer-Pays Rating Model and Ratings Inflation: Evidence from Corporate Credit Ratings, Working Paper.

  62. 62.

    Adrian, (2014), Ibid. p. 6.

  63. 63.

    A. Sunderam, (2012), Money Creation and the Shadow Banking System, Harvard Business School Working Paper & Review of Financial Studies.

  64. 64.

    D. Diamond et al., (1983), Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy Vol. 91, pp. 401–419.

  65. 65.

    Adrian, (2014), Ibid. p. 6. See in detail: A. Martin et al., (2011), Repo Runs. Federal Reserve Bank of New York Staff Report, Nr. 444 (repo borrowers face constraints due to the scarcity of collateral and the liquidity of collateral). T. Adrian et al., (2013), Repo and Securities Lending, Quantifying Systemic Risk Measurement: NBER Research Conference Report Series, (ed.) J.G. Haubrichet al., University of Chicago Press, Chicago—for a review of the differences between the tri-party repo market and the bilateral repo market.

  66. 66.

    Adrian, (2014), Ibid. p. 7.

  67. 67.

    Adrian, (2014), Ibid. pp. 7–11.

  68. 68.

    Policies cover areas as diverse as capital regulation, wholesale money market funding, insurance company structure, disclosure policies, underwriting standards, among many others, (Adrian, (2014), Ibid. p. 20.). Run and funding risks emanating from the tri-party repo market and the money market fund sector remain current, while risks from ABCP conduits, SIVs and CDOs have receded, in part due to regulatory and accounting changes.

  69. 69.

    Adrian, (2014), Ibid. p. 20.

  70. 70.

    Adrian, (2014), Ibid. pp. 12–20.

Author information

Authors and Affiliations

  1. Hong Kong, China

    Luc Nijs

Authors
  1. Luc Nijs
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

© 2020 The Author(s)

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Nijs, L. (2020). The Policy Train Chasing Shadow Banking. In: The Handbook of Global Shadow Banking, Volume I. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-34743-7_7

Download citation

  • DOI: https://doi.org/10.1007/978-3-030-34743-7_7

  • Published:

  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-030-34742-0

  • Online ISBN: 978-3-030-34743-7

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation