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.

This paper studies whether the involvedness of a firm’s main bank into different types of securitisation activity influences credit supply before and during the 2007-8 financial crisis. The authors find that, in general, a relationship with a bank that is more involved in securitisation activities relaxes credit constraints in normal periods. In contrast, while a relationship with a firm’s main bank that issues covered bonds reduces credit rationing during crisis periods, the issuance of asset-backed securities by a firm’s main bank aggravates these firms' credit rationing in crisis periods.

Before the global crisis, securitisation was hailed as a major breakthrough for the safe functioning of financial markets. Now it is suffering from seriously bad public relations. This column presents evidence from 50 Italian banks between 1995 and 2006 and argues that securitisation, by itself, does not deserve such a nasty reputation.

Are policymakers on track to prevent a repeat global crisis? This column says the answer is probably “no”. It argues that the current financial reform efforts are mostly aimed at the symptoms rather than the underlying illness. The fundamental problem in the current global macroeconomic and financial equilibrium is one of a shortage of safe assets.

Mortgage-backed securities have played a major role in the financial crisis and aren’t very popular as a result. This column documents macroeconomic benefits of these instruments, showing that economies with more developed markets for securitised mortgage debt share more consumption risk with other economies.

The desire to regulate to avoid repeating this financial crisis is commendable, but this column says that the haste with which new regulations are being promulgated is unnecessary and dangerous. Precursory analysis that is incomplete, incorrect, or inadequate creates substantial potential for unintended consequences. We should take the time to appropriately analyse, design, and implement new regulation.

Did securitisation disperse risks? This column argues that it undermined financial stability by concentrating risk. Securitisation allowed banks to leverage up in tranquil times while concentrating risks in the banking system by inducing banks and other financial intermediaries to buy each other’s securities with borrowed money.

This column warns against bank nationalisation without state control. Bankers will not hesitate to enrich themselves at the expense of the public good if they have the opportunity.

CEPR Policy Insight No. 32 attributes the ongoing financial crisis to the economic and political difficulties of monitoring and controlling the production and distribution of safety-net subsidies.