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Shadow Banking Risks and Key Vulnerabilities

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

Abstract

This chapter will review the risks of the shadow banking system and provide the background for understanding the different areas where the supervising authorities are planning to strengthen oversight and control.

Keywords

Monetary Policy Central Bank Banking Sector Real Economy Monetary Authority 
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.

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Notes

  1. 3.
    See Langfield and Pagano (2015) “Bank Bias in Europe: Effects on Systemic Risk and Growth,” ECB Working Paper, no. 1797, where the authors argue that the phenomena arise owing to an amplification mechanism, by which banks overextend and misallocate credit when asset prices rise, and ration it when they drop, and then conclude by discussing policy solutions to Europe’s “bank bias,” which include reducing regulatory favouritism towards banks, while simultaneously supporting the development of securities markets; see also Espinosa, Vega, and Russell (2015) “Interconnectedness, Systemic Crises and Recessions,” IMF WorkingPaper, no. 15/46 where the authors attempt to capture and integrate four widely held views about financial crises.Google Scholar
  2. 5.
    See Capriglione (1994) L’ordinamento finanziario verso la neutralità (Padova), p. VII.Google Scholar
  3. 8.
    See Knight (1921) Risk, Uncertainty, and Profit(Cambridge), where it is highlighted that “the difficulties … arisen from a confusion of ideas which goes deep down into the foundations of our thinking.”Google Scholar
  4. 9.
    See Acharya, Schnabl, and Suarez (2012) “Securitization Without Risk Transfer,” CEPR Discussion Paper, no. DP8769, where the authors analyze asset-backed commercial paper conduits, which experienced a shadow-banking “run” and played a central role in the early phase of the financial crisis of 2007–2009.Google Scholar
  5. 10.
    This is a dynamic shown by the recent crisis, see Anand Sinha (2013) Regulation of Shadow Banking — Issues and Challenge, cit., where it is stated that “these effects were powerfully revealed during the global financial crisis in the form of dislocation of asset-backed commercial paper (ABCP) markets, the failure of an originate-to-distribute model employing structured investment vehicles (SIVs) and conduits, ‘runs’ on MMFs and a sudden reappraisal of the terms on which securities lending and repos were conducted.”Google Scholar
  6. 11.
    See Moreira and Savov (2014) “The Macroeconomics of Shadow Banking,” NBER Working Paper, no. w20335, for an interesting macroeconomic model that centers on liquidity transformation in the financial sector.Google Scholar
  7. 12.
    See O’Doherty, Savin, and Tiwari (2011) “Modeling the Cross Section of Stock Returns: A Model Pooling Approach,” Journal of Financial and Quantitative Analysis (JFQA), where the authors find out how the benefits to model pooling are most pronounced during periods of such economic distress and recognize it as a valuable tool for asset allocation strategies.Google Scholar
  8. 13.
    See Briand, Nielsen, and Stefek (2009) “Portfolio of Risk Premia: A New Approach to Diversification,” MSCI Barra Research Paper, no. 2009-01, where the authors confirm the benefits of diversification (in terms of less volatility) with a simple asset allocation case study, by comparing a 60/40 equity/fixed income allocation with an equal weighted allocation across eleven style and strategy risk premia.Google Scholar
  9. 14.
    See Anand Sinha (2013) Regulation of Shadow Banking — Issues and Challenge, cit.Google Scholar
  10. 15.
    See FSB, Financial Reforms — Update on Progress to G20 Finance Ministers and Central Bank Governors, April 4, 2014, p. 1.Google Scholar
  11. 17.
    See also Maimeri (2011) “Criteri di proporzionalità ed efficacia dei modelli di risk management,” Diritto della banca e del mercato finanziario, f. 2, pt. 1, p. 241 ff., for an analysis of the Italian legislation on this topic.Google Scholar
  12. 18.
    See Adrian, Ashcraft, and Cetorelli (2013) “Shadow Bank Monitoring,” FRB of New York Staff Report, no. 638, where the authors, by describing the characteristics of the shadow banking system and its interconnectedness with regulated financial institutions, call for a massive action of monitoring risks taking into account the recent efforts by the FSB.Google Scholar
  13. 19.
    See Campbel and Kracaw (1980) “Information Production, Market Signalling, and the Theory of Financial Intermediation,” The Journal of Finance, Vol. 35, Issue 4, p. 863 ff.CrossRefGoogle Scholar
  14. 21.
    See, on this topic, Antonucci (2009) “Regole di condotta e conflitti di interesse,” Banca borsa e titoli di credito, 2009, f. 1, p. 9 ff.Google Scholar
  15. 22.
    See Luttrell, Rosenblum, and Thies (2012) “Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned,” Staff Papers Federal Reserve Bank of Dallas, no. 18.Google Scholar
  16. 23.
    See Bloise, Reichlin, and Tirelli (2013) “Fragility of Competitive Equilibrium with Risk of Default,” Review of Economic Dynamics, p. 271 ff.Google Scholar
  17. 24.
    See Jobst (2010) “The Credit Crisis and Operational Risk—Implications for Practitioners and Regulators,” Journal of Operational Risk, Vol. 5, Issue 2, where the author highlights the increased importance of operational risk underneath greater systemic risk concerns. In fact, from the author’s point of view, the fallout from the financial crisis has demonstrated that many sources of systemic risk were triggered by vulnerabilities in operational risk management—which has not kept pace with financial innovation—and that there has been an excessive focus of regulation on prudential requirements, with a lack of identification of substantial operational risk in market-based liquidity transformation.Google Scholar
  18. 25.
    On the fees used in the practices, see Sciarrone Alibrandi (2011) “Le clausole di remunerazione degli affidamenti,” Analisi Giuridica dell’Economia, f. 1, p. 169 ff.Google Scholar
  19. 34.
    See Benigno and Romei (2014) “Debt Deleveraging and The Exchange Rate,” Journal of International Economics, 93, p. 1 ff.Google Scholar
  20. 35.
    See Rule (2012), “Collateral management in central bank policy operations,” in Bank of England, Centre for Central Banking Studies Handbook, no. 31 about the criteria used for collateralized lending of central banks, with regard to ECB and FED.Google Scholar
  21. 37.
    See Goodhart (2005) “Financial Regulation, Credit Risk and Financial Stability,” National Institute Economic Review, Vol. 192, Issue 1, p. 118 ff.CrossRefGoogle Scholar
  22. 38.
    See Adrian and Shin (2009) The Shadow Banking System: Implications for Financial Regulation, no. 382, Staff Report, Federal Reserve Bank of New York.Google Scholar
  23. 40.
    See Lemma (2013) “Informazione finanziaria e tutela dei risparmiatori,” in Capriglione (ed.), I contratti del risparmiatore (Milano), p. 259 ff.Google Scholar
  24. 46.
    See Bank of England, Liquidity Insurance at the Bank of England: Developments in the Sterling Monetary Framework, October 2013, p. 1, 4th edition.Google Scholar
  25. 47.
    See Benigno and Paciello (2014) “Monetary Policy, Doubts and Asset Prices,” Journal of Monetary Economics, 64, p. 85 ff.CrossRefGoogle Scholar

Copyright information

© Valerio Lemma 2016

Authors and Affiliations

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

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