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The Shadow Banking System: Implications for Financial Regulation

18 Pages Posted: 30 Jul 2009  

Tobias Adrian

International Monetary Fund

Hyun Song Shin

Bank for International Settlements

Date Written: July 1, 2009

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.

Keywords: financial architecture, regulatory reform

JEL Classification: G28, G18, K20

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: https://ssrn.com/abstract=1441324 or http://dx.doi.org/10.2139/ssrn.1441324

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 ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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

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