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http://ssrn.com/abstract=1441324
 
 

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The Shadow Banking System: Implications for Financial Regulation


Tobias Adrian


Federal Reserve Bank of New York

Hyun Song Shin


Princeton University - Department of Economics

July 1, 2009

FRB of New York Staff Report No. 382

Abstract:     
The current financial crisis has highlighted the growing importance of the 'shadow banking system,' which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to 'leverage up' by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.

Number of Pages in PDF File: 18

Keywords: financial architecture, regulatory reform

JEL Classification: G28, G18, K20

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Date posted: July 30, 2009  

Suggested Citation

Adrian, Tobias and Shin, Hyun Song, The Shadow Banking System: Implications for Financial Regulation (July 1, 2009). FRB of New York Staff Report No. 382. Available at SSRN: http://ssrn.com/abstract=1441324 or http://dx.doi.org/10.2139/ssrn.1441324

Contact Information

Tobias Adrian (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://nyfedeconomists.org/adrian/
Hyun Song Shin
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States

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