Abstract

http://ssrn.com/abstract=1574970
 
 

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Shadow Banks and the Financial Crisis of 2007-2008


Jason C. Hsu


Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Max Moroz


Research Affiliates, LLC

November 2, 2010

In 'THE BANKING CRISIS HANDBOOK', Chapter 3, pp. 39-56, Greg Gregoriou, ed., CRC Press, 2009

Abstract:     
This paper argues that bank runs on the shadow banking system was a significant factor in the spread of subprime losses to the overall financial system. Highly leveraged shadow banks with illiquid assets suffered from the loss spiral effect whereby they were forced to deleverage due to higher margin requirements and falling asset prices. This deleveraging increased margin requirements and reduced asset valuations, thus fueling the next round of the loss spiral. We also show that informational problems, agency issues, the reliance on historical data to estimate future risks, and the lack of a multilateral settlement mechanism contributed to the spread of the financial crisis.

Number of Pages in PDF File: 19

Keywords: Shadow Banking, Financial Crisis, Subprime Crisis

JEL Classification: G10, G14, G20

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Date posted: March 20, 2010 ; Last revised: November 3, 2010

Suggested Citation

Hsu, Jason C. and Moroz, Max, Shadow Banks and the Financial Crisis of 2007-2008 (November 2, 2010). In 'THE BANKING CRISIS HANDBOOK', Chapter 3, pp. 39-56, Greg Gregoriou, ed., CRC Press, 2009. Available at SSRN: http://ssrn.com/abstract=1574970

Contact Information

Jason C. Hsu (Contact Author)
Research Affiliates, LLC ( email )
620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States
HOME PAGE: http://www.jasonhsu.org
University of California, Los Angeles - Anderson School of Business
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
Max Moroz
Research Affiliates, LLC ( email )
620 Newport Center Drive
Suite 900
Newport Beach, CA 92660
United States
HOME PAGE: http://researchaffiliates.com/index.htm
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