Abstract

http://ssrn.com/abstract=1640545
 
 

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Shadow Banking


Zoltan Pozsar


Federal Reserve Banks - Federal Reserve Bank of New York

Tobias Adrian


Federal Reserve Bank of New York

Adam B. Ashcraft


Federal Reserve Bank of New York

Haley Boesky


Bank of America Merrill Lynch

July 15, 2010


Abstract:     
The rapid growth of the market-based financial system since the mid-1980s changed the nature of 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 banking system. 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.

Number of Pages in PDF File: 81

Keywords: shadow banking, financial intermediation

JEL Classification: G20, G28, G01

working papers series


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Date posted: July 16, 2010  

Suggested Citation

Pozsar, Zoltan and Adrian, Tobias and Ashcraft, Adam B. and Boesky, Haley, Shadow Banking (July 15, 2010). Available at SSRN: http://ssrn.com/abstract=1640545 or http://dx.doi.org/10.2139/ssrn.1640545

Contact Information

Zoltan Pozsar (Contact Author)
Federal Reserve Banks - Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
Tobias Adrian
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://nyfedeconomists.org/adrian/
Adam B. Ashcraft
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)
Haley Boesky
Bank of America Merrill Lynch
100 North Tryon Street
6th Floor
Charlotte, NC 28255
United States
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