Shadow Banking - A Federal Reserve study

[editec]

Found this paper by Zoldan Poszar, published by the FEDERAL RESERVE, that I think a few of us here, might find of interest.

http://www.newyorkfed.org/research/staff_reports/sr458.pdf

Abstract​

The rapid growth of the market-based financial system since the mid-1980s changed the natureof financial intermediation in the United States profoundly. Within the market-based financial system, “shadow banks” are particularly important institutions. Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include
finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance companies, structured investment vehicles, credit hedge funds, money market mutual funds, securities lenders, and government-sponsored enterprises.
Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo.​

This intermediation chain binds shadow banks into a network, which is the shadow bankingsystem. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity and credit
transformation in the shadow banking system thus contributed significantly to asset bubbles in residential and commercial real estate markets prior to the financial crisis.​

We document that the shadow banking system became severely strained during the financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity transformation, but unlike traditional financial intermediaries, they lack access to public sources of liquidity, such as the Federal Reserve’s discount window, or public sources of insurance, such as federal deposit insurance. The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit
intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks. Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system.​

I haven't had time to study it (I found it as a tangential leap from another paper I was studying and want to complete that train of reading) but I suspect that the MAP of the shadow banking might be particularly of interest to those of us who are not entirely conversant with the banking industry that exists today.

Hopefully I can get back to this to make some comments or perhaps folks like TORO or George Phillips (and others of like minds who are truly interested in discussions about ECON) might beat me to the punch and weight in with their thoughts about this paper.

FWIW this paper makes me wish I had a large scale printer so I could study this chart in a large enough scale to take it all in at once, rather than having to shift the monitor to see it only part by part.

STill, for someone like myself, (mostly cluelsss about the mechanics of our curent banking system) this ought to be a nice introduction to the BANKING WORLD as it exists today.

 

[Mad Scientist]

It's a map of who really runs this country.