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The Shadow Banking System and the Need for Supervision

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The Shadow Banking System

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Abstract

In this chapter I will move from the link between the deregulation of the banking industry and the freedom to perform market-based financing, in order to understand the need for checks and balances in the shadow banking system.

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Notes

  1. see Capriglione (1997) “Presentazione,” in Capriglione (ed.) La disciplina degli intermediari e dei mercati finanziari, (Padova) p. XIV.

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  4. See Gorton (2009) “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,” SSRN Working Paper, no. 1401882, p. 1, where the author admits that “many private decisions were made, over a long time, which created the shadow banking system.”

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  5. See Cioffi (2010) “Persistence and Perversity: The Global Financial Crisis, the Failure of Reform, and the Legitimacy Crisis of Finance Capitalism,” Western Political Science Association 2010 Annual Meeting Paper, for a wider analysis of this topic from a political science perspective.

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  9. For the juridical fundaments of such a decision see Oppo (1990) “Commento sub art. 41 Cost,” Capriglione and Mezzacapo (eds) Codice commentato della banca, (Milano) I, p. 3 ff.

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  37. See Draghi (2013) “Foreword,” in ESRB, Annual Report 2013, cit., p. 5.

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  42. this approach has been confirmed by FSB (2014), Global Shadow Banking Monitoring Report, cit., presenting the data from 25 jurisdictions and the euro area as a whole, covering about 80 per cent of global GDP and 90 per cent of global financial system assets.

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  43. See Schoenmaker (2012) “Banking Supervision and Resolution: The European Dimension,” Law and Financial Markets Review, Vol. 6, 2012, p. 52 ff., where the author highlights that “National authorities aim for the least-cost solution for domestic taxpayers. This results in an undersupply of the public good of global financial stability.”

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  49. This is in line with the goal of Draghi (2014) Monetary Policy in a Prolonged Period of Low Inflation, Sintra, May 26, 2014, where he clarified that “an intermediate situation is one where credit supply constraints interfere with the transmission of monetary policy and impair the effects of our intended monetary stance. This would require targeted measures to help alleviate credit constraints.”

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  50. See, on thispoint, Capriglione and Semeraro (2012) Crisi finanziaria e dei debiti sovrani. L’Unione Europea tra rischi ed opportunità (Torino) p. 100 ff., where the analysis is recalled of Belke (2012) “Three years LTROs—A first assessment of Non-Standard Policy,” Note of the Directorate General for Internal Policies—Policy Department: Economic and Scientific Policy, April.

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  51. See FSB, Recommendations to Strengthen Oversight and Regulation of Shadow Banking, October 27, 2011, p. 16 ff.

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  52. See Zetzsche (2012) The Alternative Investment Fund Managers Directive — European Regulation of Alternative Investment Funds (Alphen and den Rijn), p. 21 ff., where the author highlight that “when the financial crisis came upon Europe … the light touch regulation, pro-market attitude for which the hedge funds group and the private equity group stood ran counter to the political interests of subjecting managers of AIFs to more stringent regulatory oversight.”

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  53. For an interesting point of view, see also Buttigieg (2013) “Negotiating and Implementing the AIFMD: The Malta Experience,” The Accountant, Spring 2014, p. 34 ff.

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  54. With regard to UCITs, see European Commission, Greater Protection for Retail Investors: Commission Welcomes European Parliament Adoption of Strengthened European Rules on UCITS, Brussels, April 15, 2014.

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  55. See, on this point, Cassese (2009) Il diritto globale, (Torino) p. 17 ff.

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  56. See Lemma (2006) “‘Soft law’ e regolazione finanziaria,” Nuova giuris prudenza civil ecommentata, f. 11, p. 600 ff.

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  60. See also Sharma (2014) “Shadow Banking, Chinese Style,” Economic Affairs, Vol. 34, Issue 3, p. 340 ff., where he tries to measure and understand the growth of shadow banks in China, by investigating how Chinese Government can best utilise the services of shadow banks without create systemic risks for the global financial system.

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  61. See Errico et al. (2014) “Mapping the Shadow Banking System Through a Global Flow of Funds Analysis,” IMF Working Paper—Statistics Department, p. 37, even if it is still to be completed the data collection, in order to proceed, successively, to the verification of their reliability, as well as to identify the nodes interconnected of financial flows mentioned above (with respect to “each sector in each location”).

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  66. See Posner (2007) Economic Analysis of Law, cit., p. 469, where the author explains the link between diversification, leverage, and debt-equity ratio and p. 473 on the challenge of “behavioral finance,” which—as aforementioned—does not find any protection in the shadow banking system.

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  67. This is consistent with the approach of Shavell (2004) Foundations of Economic Analysis of Law (Cambridge), p. 473 ff., and, in particular, pp. 474–490, where there are the differences between the “certain enforcement” and the “enforcement with a probability.”

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  68. See FSB (2014) Structural Banking Reforms: Cross-border Consistencies and Global Financial Stability Implications, for a quantitative assessment of potential cross-border financial stability implications related to national structural banking reforms that have recently been implemented or proposed.

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  1. Marconi University of Rome, Italy

    Valerio Lemma (Associate Professor of Law and Economics)

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© 2016 Valerio Lemma

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Lemma, V. (2016). The Shadow Banking System and the Need for Supervision. In: The Shadow Banking System. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/9781137496133_9

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