Abstract
We provide an overview of the rapidly evolving literature on shadow credit intermediation. The shadow banking system consists of a web of specialised financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Much of shadow banking activities is intertwined with the operations of core regulated institutions such as bank holding companies and insurance companies, thus creating a source of systemic risk for the financial system at large. We review fundamental reasons for the existence of shadow banking, explain the functioning of shadow banking institutions and activities, discuss why shadow banks need to be regulated, and review the impact of recent reform efforts on shadow banking credit intermediation.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Money market mutual funds in the United States are regulated under Rule 2a-7 of the Securities and Exchange Commission’s (SEC) Investment Company Act of 1940.
Bibliography
Acharya, V., P. Schnabl, and G. Suarez. 2010. Securitisation without risk transfer. NBER working paper 15730.
Acharya, V., M. Richardson, S.V. Nieuwerburgh, and L.J. White. 2011. Guaranteed to fail: Fannie Mae, Freddie Mac, and the debacle of mortgage finance. Princeton: Princeton University Press.
Adrian, T., and A.B.. Ashcraft. 2012. Shadow bank regulation. Annual Review of Financial Economics. (forthcoming).
Adrian, T., and N. Boyarchenko. 2012. Intermediary leverage cycles and financial stability, Federal Reserve Bank of New York staff reports, vol. 567.
Adrian, T., and M. Fleming. 2005. What financing data reveal about dealer leverage. Federal Reserve Bank of New York Current Issues in Economics and Finance 11(3): 1–7.
Adrian, T., and H.S. Shin. 2009. The shadow banking system: Implications for financial regulation. Banque de France Financial Stability Review 13: 1–10.
Adrian, T., and H.S. Shin. 2010. Liquidity and leverage. Journal of Financial Intermediation 19(3): 418–437.
Adrian, T., C. Burke, and J. McAndrews. 2009a. The federal reserve’s primary dealer credit facility. Federal Reserve Bank of New York Current Issues in Economics and Finance 15(4): 1–12.
Adrian, T., E. Moench, and H.S. Shin. 2009b. Financial intermediation, asset prices, and macroeconomic dynamics, Federal Reserve Bank of New York staff report, vol. 422.
Adrian, T., K. Kimbrough, and D. Marchioni. 2011. The Federal Reserve’s commercial paper funding facility. Federal Reserve Bank of New York Economic Policy Review 17(1): 25–39.
Adrian, T., B. Begalle, A. Copeland, and A. Martin. 2013. Repo and securities lending. In: Quantifying systemic risk measurement: NBER research conference report series, ed. J.G. Haubrich and A.W. Lo. University of Chicago Press. (forthcoming).
Armantier, O., S. Krieger, and J. McAndrews. 2008. The Federal Reserve’s Term Auction Facility. Federal Reserve Bank of New York Current Issues in Economics and Finance 14(5).
Ashcraft, A.B.., and T. Schuermann. 2008. Understanding the securitisation of subprime mortgage credit. Foundations and Trends in Finance 2(3): 191–309.
Ashcraft, A., P. Goldsmith-Pinkham, P. Hull, and J. Vickery. 2011. Credit ratings and security prices in the subprime MBS market. American Economic Review 101(3): 115–119.
Ashcraft, A.B.., A. Malz, and Z. Pozsar. 2012. The federal reserve’s term asset-backed securities loan facility. Federal Reserve Bank of New York Economic Policy Review. (forthcoming).
Avraham, D., P. Selvaggi, and J. Vickery. 2012. A structural view of bank holding companies. Federal Reserve Bank of New York Economic Policy Review 18(2): 65–82.
Bord, V., and J.C. Santos. 2012. The rise of the originate-to-distribute model and the role of banks in financial intermediation. Federal Reserve Bank of New York Economic Policy Review 18(2): 21–34.
Brunnermeier, M.K., and L.H. Pedersen. 2009. Market liquidity and funding liquidity. Review of Financial Studies 22(6): 2201–2238.
Brunnermeier, M.K., and Y. Sannikov. 2012. A macroeconomic model with a financial sector. Working paper, Princeton University.
Cetorelli, N. 2012. A principle for forward-looking monitoring of financial intermediation: Follow the banks! Federal Reserve Bank of New York Liberty Street Economics Blog. Available at http://libertystreeteconomics.newyorkfed.org/2012/07/a-principle-for-forward-looking-monitoring-of-financial-intermediation-follow-the-banks.html. 23 July 2012.
Cetorelli, N., and S. Peristiani. 2012. The role of banks in asset securitisation. Federal Reserve Bank of New York Economic Policy Review, 18(2): 47–64.
Cohen, A. 2011. Rating shopping in the CMBS market. Presented at regulation of systemic risk, Washington, DC, 15–16 Sep.
Copeland, A. 2012. Evolution and heterogeneity among larger bank holding companies: 1994 to 2010. Federal Reserve Bank of New York Economic Policy Review 18(2): 83–93.
Copeland, A., A. Martin, and M. Walker. 2011. Repo runs: Evidence from the tri-party repo market, Federal Reserve Bank of New York staff report. Vol. 506. New York: Federal Reserve Bank of New York.
Coval, J., J. Jurek, and E. Stafford. 2009. The economics of structured finance. Journal of Economic Perspectives 23(1): 3–25.
Covitz, D., N. Liang, and G. Suarez. 2012. The evolution of a financial crisis: Panic in the asset-backed commercial paper market. Journal of Finance. (forthcoming).
Dang, T.V., G. Gorton, and B. Holmström. 2009. Opacity and the optimality of debt for liquidity provision Yale/MIT working paper.
Diamond, D., and P. Dybvig. 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91: 401–419.
Duffie, D. 2012. Market making under the proposed volcker rule. Working paper, Stanford University.
Financial Accounting Standards Board. 2012. Briefing document: FASB statement 166 and 167. Available at http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176155633483.
Financial Stability Board. 2011. Shadow banking: Strengthening oversight and regulation. Available at http://www.financialstabilityboard.org/publications/r_111027a.pdf.
Financial Stability Board. 2012. Progress report to the G20 on strengthening the oversight and regulation of shadow banking. Available at http://www.financialstabilityboard.org/publications/r_120420c.pdf.
Fleming, M., and K. Garbade. 2003. The repurchase agreement refined: GCF repo. Federal Reserve Bank of New York Current Issues in Economics and Finance 9(6): 1–7.
Fleming, M., W.B. Hrung, and F.M. Keane. 2010. Repo market effects of the term securities lending facility. American Economic Review: Papers and Proceedings 100: 591–596.
Fostel, A., and J. Geanakoplos. 2008. Leverage cycles and the anxious economy. American Economic Review 98(4): 1211–1244.
Frame, W.S., and L.J. White. 2005. Fussing and fuming over fannie and freddie: How much smoke, how much fire? Journal of Economic Perspectives 19(2): 159–184.
Garleanu, N., and L.H. Pedersen. 2011. Margin-based asset pricing and deviations from the law of one price. Review of Financial Studies 24(6): 1980–2022.
Gennaioli, N., A. Shleifer, and R. Vishny. 2012a. Neglected risks, financial innovation, and financial fragility. Journal of Financial Economics. (forthcoming).
Gennaioli, N., A. Shleifer, and R. Vishny. 2012b. A model of shadow banking. Journal of Finance. (forthcoming).
Gorton, G. 1985. Clearinghouses and the origin of central banking in the United States. Journal of Economic History 4(2): 277–283.
Gorton, G., and A. Metrick. 2011. Regulating the shadow banking system. Brookings Papers on Economic Activity 2010: 261–312.
Gorton, G., and A. Metrick. 2012. Securitised banking and the run on repo. Journal of Financial Economics 104: 425–451.
Holmström, B., and J. Tirole. 1998. Private and public supply of liquidity. Journal of Political Economy 106(1): 1–40.
International Institute of Finance. 2012. Shadow banking: A forward-looking framework for effective policy. Washington, DC: Institute of International Finance.
Jaremski, M. 2010. Free bank failures: Risky bonds versus undiversified portfolios. Journal of Money, Credit, and Banking 42(8): 1565–1587.
Kacperczyk, M., and P. Schnabl. 2011. Does organizational form affect risk taking? Evidence from money market mutual funds. New York University working paper.
Keys, B., T. Mukherjee, A. Seru, and V. Vig. 2010. Did securitisation lead to lax screening? Evidence from subprime loans. Quarterly Journal of Economics 125(1): 307–362.
Krishnamurthy, A., S. Nagel, and D. Orlov. 2011. Sizing up repo. NBER/CEPR/Stanford/Northwest working paper.
Levitin, A., and S. Wachter. 2011. Explaining the housing bubble. Research paper 10–15, Institute for Law and Economics, University of Pennsylvania.
Mandel, B., D. Morgan, and C. Wei. 2012. The role of bank credit enhancements in securitisation. Federal Reserve Bank of New York Economic Policy Review 18(2): 35–46.
Martin, A., D. Skeie, and E. von Thadden. 2011. Repo runs, Federal Reserve Bank of New York staff report. Vol. 444. New York: Federal Reserve Bank of New York.
Mathis, J., J. McAndrews, and J.C. Rochet. 2009. Rating the raters: Are reputation concerns powerful enough to discipline rating agencies? Journal of Monetary Economics 57(5): 657–674.
McCabe, P. 2011. An A-/B-share capital buffer proposal for money market funds. Working paper.
McCabe, P.E., M. Cipriani, M. Holscher, and A. Martin. 2012. The minimum balance at risk: A proposal to mitigate the systemic risks posed by money market funds, Federal Reserve Bank of New York staff report. Vol. 564. New York: Federal Reserve Bank of New York.
McCulley, P. 2007. Teton reflections. PIMCO Global Central Bank Focus.
Merton, R.C. 1977. An analytical derivation of the cost of deposit insurance and loan guarantees. Journal of Banking & Finance 1: 3–11.
Merton, R.C., and Z. Bodie. 1993. Deposit insurance reform: A functional approach. Carnegie-Rochester Conference Series on Public Policy 38: 1–34.
Passmore, W., S.M. Sherlund, and G. Burgess. 2005. The effect of housing government-sponsored enterprises on mortgage rates. Real Estate Economics 33(3): 427–463.
Pozsar, Zoltan. 2008. The rise and fall of the shadow banking system. Available at http://www.economy.com/sbs.
Pozsar, Z., T. Adrian, A.B.. Ashcraft, and H. Boesky. 2010. Shadow banking, Federal Reserve Bank of New York staff report. Vol. 458. New York: Federal Reserve Bank of New York. Available at http://www.newyorkfed.org/research/staff_reports/sr458.pdf.
Rajan, R. 2005. Has financial development made the world riskier? In Proceedings of the Federal Reserve Bank of Kansas city economics symposium, 313–369.
Ricks, M. 2010. Shadow banking and financial regulation. Columbia Law and Economics working paper 370.
Rockoff, H. 1991. In Lesseons from the American experience with free banking in unregulated banking: Chaos or order?, ed. F. Capie and G. Wood. London: Macmillan Academic and Professional.
Schwarcz, S. 2012. Regulating shadow banking. Boston University Review of Banking and Financial Law.
Squam Lake Group. 2011. Reforming money market funds. Squam Lake Group staff report.
Stein, J. 2010. Securitisation, shadow banking, and financial fragility. Daedalus 139(4): 41–51.
Sunderam, A. 2012. Money creation and the shadow banking system. Harvard Business School working paper.
Tucker, P. 2010. Shadow banking, financing markets and financial stability. Remarks by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at a Bernie Gerald Cantor (BGC) Partners Seminar, London, 21 Jan 2010.
Wermers, R. 2011. Runs on money market mutual funds. University of Maryland working paper.
Wiggers, T., and A.B.. Ashcraft. 2012. Defaults and losses on commercial real estate bonds during the great depression era, Staff report. Vol. 544. New York: Federal Reserve Bank of New York.
Xia, H., and G. Strobl. 2012. The issuer-pays rating model and ratings inflation: Evidence from corporate credit ratings. SSRN working paper.
Acknowledgments
The authors thank Nicola Cetorelli and Andrei Shleifer for helpful comments. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.
Author information
Authors and Affiliations
Corresponding author
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Adrian, T., Ashcraft, A.B. (2018). Shadow Banking: A Review of the Literature. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2946
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_2946
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences