The Shadow Banking System as an Alternative Source of Liquidity

  • Valerio Lemma
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)


This chapter considers the key economic drivers of shadow banking. It begins by examining the efficiencies of this system, that are the rationale for the bundling of activities that we define as market-based financing. The chapter goes on to take into account the market failures amplified by the shadows, focusing on asymmetric information, lack of transparency, and market instability.


Monetary Policy Banking System Real Economy Maturity Transformation Economic Determinant 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. 1.
    See Brogi (2014) “Shadow Banking, Banking Union and Capital Markets Union,” Law and Economics Yearly Review, 2014, p. 383 ff.Google Scholar
  2. 2.
    See Claessens, Pozsar, Ratnovski, and Singh (2012) Shadow Banking: Economics and Policy, edited by the IMF, December 4, p. 8.Google Scholar
  3. 4.
    But, this is not only the main parameter, given the importance of the qualitative elements in the regulation of financial markets, see Capriglione (2010) Misure anticrisi tra regole di mercato e sviluppo sostenibile, cit., p. 83 ff.Google Scholar
  4. 5.
    See manzocchi and Padoan (2005) “The Role of Financial Markets in Economic Performance,” in Boyd (ed.), European—American Trade and Financial Alliances (Cheltenham) p. 1 ff.Google Scholar
  5. With regard to the juridical nature of banking after the harmonization of European legal framework, see Capriglione (2012) “Commento sub art. 10 tub,” in Capriglione (ed.), Commentario al testo unico delle leggi in materia bancaria e creditizia (Padova 2012), I, p. 114 ff.Google Scholar
  6. 8.
    See Claessens, Pozsar, Ratnovski, and Singh (2012) Shadow Banking: Economics and Policy, IMF Research Department, December 4, p. 10, where it is explained that “today a large part of demand for savings instruments comes from corporations and the asset management complex. Global corporate short-term savings grew from less than $50 billion in 1990 to more than $750 billion in 2007 and over $1.2 trillion by the end of 2010.”Google Scholar
  7. 10.
    See Claessens, Pozsar, Ratnovski, and Singh (2012) Shadow Banking: Economics and Policy, cit., p. 25.Google Scholar
  8. 11.
    On this point, see Monti (2001) “La dimensione internazionale della politica di concorrenza europea,” Mercatoconcorrenzaregole, f. 3, p. 423 where the author suggests that the European institution must observe the global market (and not only the European one).Google Scholar
  9. 17.
    See stiglitz (2001) “Information and the Change in the Paradigm in Economics,” Prize Lecture, December 8, p. 474, where it is said that “there are asymmetries of information between those governing and those governed, and just as markets strives to overcome asymmetries of information, we need to look for ways by which the scope for asymmetries of information in political processes can be limited and their consequences mitigated.”Google Scholar
  10. 18.
    See Di Cagno and spallone (2010) “An Experimental Investigation on Optimal Bankruptcy Laws,” European Journal of Law and Economics, vol. 30, p. 205 ff.Google Scholar
  11. 19.
    See Keys, Mukherjee, Seru, and Vig (2010) “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans,” The Quarterly Journal of Economics, no. 125, p 307 ff., where the authors try to solve the question of whether the securitization process reduced the incentives of financial intermediaries to carefully screen borrowers.Google Scholar
  12. 21.
    See, on this point, Stefanelli (2009) “Problematiche in ordine alla efficacia della regolazione pubblica in materia di informazione finanziaria,” Il diritto dell’economia, p. 297 ff.Google Scholar
  13. 22.
    See Murphy (2013) Shadow Banking: Background and Policy, edited by Federation of American Scientist, December 31, p. 12.Google Scholar
  14. 24.
    See the well-known Akerlof (1970) “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics, p. 488 ff.Google Scholar
  15. 26.
    See Mirone (2014) “Sistema e sottosistemi dellanuova disciplina della trasparenza bancaria,” Banca borsa e titoli di credito, f. 4, p. 377 ff.Google Scholar
  16. 28.
    See Gorton and Metrick (2010) “Regulating the Shadow Banking System,” Brookings Papers on Economic Activity, p. 216, where the authors “propose the use of insurance for MMMFs, combined with strict guidelines on collateral for both securitization and repos, with regulatory control established by chartering new forms of narrow banks for MMMFs and securitization, and using the bankruptcy safe harbor to incentivize compliance on repos.”Google Scholar
  17. 29.
    This appears in line with the Diamond and Dybvig model of bank runs, see Diamond and Dybvig (1983) “Bankruns, Depositinsurance, and Liquidity,” Journal of Political Economy, no. 91, p. 401 ff.Google Scholar
  18. 35.
    See Pozsar, Adrian, Ashcraft, and Boesky (2012) Federal Reserve Bank of New York Staff Reports — Shadow Banking, cit., p. 13 ff.Google Scholar
  19. 36.
    See Pozsar, Adrian, Ashcraft, and Boesky (2012) Federal Reserve Bank of New York Staff Reports — Shadow Banking, cit., whereby it is clarified also that “over the past thirty years or so, these four techniques have became widely adopted by banks and non-banks in their credit intermediation and funding practices.”Google Scholar
  20. 37.
    See Pozsar, Adrian, Ashcraft, and Boesky (2012) Federal Reserve Bank of New York Staff Reports — Shadow Banking, cit., where the authors add that “the vertical and horizontal slicing of credit intermediation is conducted through the application of a range of off-balance sheet securitization and asset management techniques (see Exhibit 5), which enable FHC-affiliated banks to conduct lending with less capital than if they had retained loans on their balance sheets.”Google Scholar
  21. 38.
    See Carey, Post, and Sharpe (1998) “Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting,” Journal of Finance, vol. 53, Issue 3, where the authors try to establish empirically the existence of specialization in private-market corporate lending, adding a new dimension to the public versus private debt distinctions now common in the literature.Google Scholar
  22. 39.
    See FSB (2014), Global Shadow Banking Monitoring Report 2014, cit. p. 5.Google Scholar
  23. 43.
    See Pozsar, Adrian, Ashcraft, and Boesky (2012) Federal Reserve Bank of New York Staff Reports — Shadow Banking, cit., p. 11, where it is stated that “through this intermediation process, the shadow banking system transforms risky, long-term loans (subprime mortgages, for example) into seemingly credit-risk free, short-term, money-like instruments, stable net asset value (NAV) shares that are issued by 2(a)-7 money market mutual funds which require daily liquidity.”Google Scholar
  24. 45.
    See Masciantonio (2013) “Identifying and Tracking Global, EU and Eurozone Systemically Important Banks with Public Data,” Bank of Italy Occasional Paper no. 204.Google Scholar
  25. 46.
    See Masera (2012) “CRAs: Problems and Perspectives,” Analisi Giuridica dell’Economia, Vol. 2, p. 425 ff.Google Scholar
  26. 48.
    See Di Gaspare (2011) Teoria e critica della globalizzazione (Padova), p. 253 ff.Google Scholar
  27. See also Masera, “Taking the Moral Hazard out of Banking: the Next Fundamental Step in Financial Reform,” PSL Quarterly Review, 2011, 64(257), p. 105 ff.Google Scholar
  28. 49.
    See Padoan (2013) “Criminalità organizzata, attività illegali nel sistema finanziario, paradisi fiscali e sviluppo economico,” Seminario della Scuola di Perfezionamento per le Forze di Polizia, Roma, 8 maggio 2013Google Scholar
  29. see also OECD (2013) “OECD Integrity Review of Italy. Reinforcing Public Sector Integrity, Restoring Trust for Sustainable Growth,” OECD Public Governance Reviews, 2013.Google Scholar
  30. See also Amorosino (2014) “Il piano nazionale anticorruzione come atto di indirizzo e coordinamento amministrativo,” Nuove Autonomie, f. 1, p. 21 ff., where the author takes in to consideration the nature and role of the “Italian anti-corruption plan,” and concludes that it is an act of administrative directive and coordination—defined as an “act of directive”—highlighting its deficiencies and limits of effectiveness.Google Scholar
  31. 52.
    See, also, Bart and McCarthy (2012) “Trading Losses: A Little Perspective on a Large Problem,” Milken Institute, October, 2012, and the report ad hoc JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses, March 15, 2013.Google Scholar
  32. 56.
    See Levy (2006) The State after Statism: New State Activities in the Age of Liberalization (Cambridge), p. 469 ff.Google Scholar

Copyright information

© Valerio Lemma 2016

Authors and Affiliations

  • Valerio Lemma
    • 1
  1. 1.Marconi University of RomeItaly

Personalised recommendations