Financial Intermediaries, Financial Stability, and Monetary Policy

39 Pages Posted: 15 Sep 2008

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: September 2008

Abstract

In a market-based financial system, banking and capital market developments are inseparable. We document evidence that balance sheets of market-based financial intermediaries provide a window on the transmission of monetary policy through capital market conditions. Short-term interest rates are determinants of the cost of leverage and are found to be important in influencing the size of financial intermediary balance sheets. However, except for periods of crises, higher balance-sheet growth tends to be followed by lower interest rates, and slower balance-sheet growth is followed by higher interest rates. This suggests that consideration might be given to a monetary policy that anticipates the potential disorderly unwinding of leverage. In this sense, monetary policy and financial stability policies are closely linked.

Keywords: monetary policy, financial stability, financial intermediation, security brokers and dealers, commercial banks

JEL Classification: E50, G20

Suggested Citation

Adrian, Tobias and Shin, Hyun Song, Financial Intermediaries, Financial Stability, and Monetary Policy (September 2008). FRB of New York Staff Report No. 346. Available at SSRN: https://ssrn.com/abstract=1266714 or http://dx.doi.org/10.2139/ssrn.1266714

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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