The 2007–08 crisis revealed regulatory failures that had allowed the shadow banking system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between these two approaches. Ring-fencing may make banking groups more easily resolvable and therefore lower the cost of imposing market discipline.
Xavier Vives, Tuesday, March 17, 2015
Benjamin Nelson, Gabor Pinter, Konstantinos Theodoridis, Monday, March 16, 2015
There has been an extensive debate over whether central banks should raise interest rates to ‘lean against’ the build-up of leverage in the financial system. This column reports on empirical evidence showing that, in contrast to the conventional view, surprise monetary contractions have tended to increase shadow bank asset growth, rather than reduce it in the US. Monetary policy had the opposite effect on commercial bank asset growth. These findings cast some doubt on the idea that monetary policy could be used to “get in all the cracks” of the financial system in a uniform way.
Alan Moreira, Alexi Savov, Tuesday, September 16, 2014
The prevailing view of shadow banking is that it is all about regulatory arbitrage – evading capital requirements and exploiting ‘too big to fail’. This column focuses instead on the tradeoff between economic growth and financial stability. Shadow banking transforms risky, illiquid assets into securities that are – in good times, at least – treated like money. This alleviates the shortage of safe assets, thereby stimulating growth. However, this process builds up fragility, and can exacerbate the depth of the bust when the liquidity of shadow banking securities evaporates.
Enrico Perotti, Thursday, January 16, 2014
The ‘shadow banking’ sector is a loose title given to the financial sector that exists outside the regulatory perimeter but mimics some structures and functions of banks. CEPR Policy Insight 69 looks into what we have learned about shadow banking since the Global Crisis.
Zoltan Pozsar, Thursday, November 7, 2013
Modern banks operate in a complex global financial ecosystem. This column argues that proper regulation requires an updating of our ideas about how they operate. Modern banks finance bond portfolios with uninsured money market instruments, and thus link cash portfolio managers and risk portfolio managers. Gone are the days when banks linked ultimate borrowers with ultimate savers via loans and deposits. The Flow of Funds should be updated to reflect the new realities.
Peter Stella, Friday, September 20, 2013
QE is still on, but central banks are pondering exit pathways. Exit requires vacuuming up excess reserves, winding down massive securities holdings, and restoring normal interest rates – all without killing the recovery. This column points to the importance of a seemingly technical issue – the impact of the exit on the supply of high-quality collateral. This matters since collateral plays a critical role in today’s credit and money creation processes. When reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’.
Stijn Claessens, Lev Ratnovski, Friday, August 23, 2013
There is much confusion about what shadow banking is and why it might create systemic risks. This column presents shadow banking as ‘all financial activities, except traditional banking, which rely on a private or public backstop to operate’. The idea that shadow banking is something that needs a backstop changes how we think about regulation. Although it won’t be easy, regulation is possible.
Stijn Claessens, Zoltan Pozsar, Lev Ratnovski, Manmohan Singh, Saturday, January 12, 2013
The risks associated with shadow banking are at the forefront of the regulatory debate. Yet, this column argues that there is as yet no established analytical approach to shadow banking. This means that policy priorities are not clearly motivated. But if we analyse securitisation and collateral intermediation – the two shadow banking functions most important for financial stability – a solid framework that includes existing policy recommendations, as well as some alternative ones, begins to emerge.
Enrico Perotti, Thursday, January 16, 2014
The ‘shadow banking’ sector is a loose title given to the financial sector that exists outside the regulatory perimeter but mimics some structures and functions of banks. This column introduces a new CEPR Policy Insight that looks into what we have learned about shadow banking since the Global Crisis.
Henry Tabe, Monday, July 4, 2011
In the aftermath of the global crisis and as the turmoil in the sovereign debt market continues, this column argues that policymakers need to get the shadow-banking sector in order if they are to restore confidence in global markets.
Viral Acharya, Friday, June 17, 2011
Viral Acharya of New York University talks to Viv Davies about capital requirements and measuring systemic risk. Acharya describes the development of the NYU Stern systemic risk rankings of US financial institutions and what he considers to be the dismal failure of the Basel risk-weight approach to addressing systemic risk. He cautions against the blanket call for more capital and instead recommends for more capital against systemic risk contributions of financial firms. He also discusses the shadow banking sector and how banking risk and sovereign risk are becoming dangerously intertwined. The interview was recorded in London on 2 June 2011. [Also read the transcript]