Why Fixing the 'Shadow Banking' Sector Is Essential for the U.S. Housing Market

Abstract

The title “shadow banking system” sounds pejorative and certainly is in the minds of most people who work in or watch the business of money and credit. In the world of subprime real estate, abuse of private financial vehicles with insurance enhancements and ratings led to the collapse of the U.S. financial sector in the 2007-2009 subprime crisis. When it functions correctly, as a non-bank system that competes with insured banks (and not as a process for hiding excessive bank leverage) the shadow banking system is, in fact, a necessary and extremely useful part of the global economy. Non-banks tend to be far more efficient than commercial banks. Additionally, non-bank finance is responsible for supporting a large fraction of overall economic growth in the U.S. and other market economies.

Keywords: shadow banking, financial crisis, mortgage finance, true sale

JEL Classification: G20, G23, G28