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.
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Notes
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.
See Capriglione (1994) L’ordinamento finanziario verso la neutralità (Padova), p. VII.
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.”
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.
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.”
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.
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.
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.
See Anand Sinha (2013) Regulation of Shadow Banking — Issues and Challenge, cit.
See FSB, Financial Reforms — Update on Progress to G20 Finance Ministers and Central Bank Governors, April 4, 2014, p. 1.
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.
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.
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.
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.
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.
See Bloise, Reichlin, and Tirelli (2013) “Fragility of Competitive Equilibrium with Risk of Default,” Review of Economic Dynamics, p. 271 ff.
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.
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.
See Benigno and Romei (2014) “Debt Deleveraging and The Exchange Rate,” Journal of International Economics, 93, p. 1 ff.
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.
See Goodhart (2005) “Financial Regulation, Credit Risk and Financial Stability,” National Institute Economic Review, Vol. 192, Issue 1, p. 118 ff.
See Adrian and Shin (2009) The Shadow Banking System: Implications for Financial Regulation, no. 382, Staff Report, Federal Reserve Bank of New York.
See Lemma (2013) “Informazione finanziaria e tutela dei risparmiatori,” in Capriglione (ed.), I contratti del risparmiatore (Milano), p. 259 ff.
See Bank of England, Liquidity Insurance at the Bank of England: Developments in the Sterling Monetary Framework, October 2013, p. 1, 4th edition.
See Benigno and Paciello (2014) “Monetary Policy, Doubts and Asset Prices,” Journal of Monetary Economics, 64, p. 85 ff.
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© 2016 Valerio Lemma
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Lemma, V. (2016). Shadow Banking Risks and Key Vulnerabilities. In: The Shadow Banking System. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/9781137496133_8
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DOI: https://doi.org/10.1057/9781137496133_8
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