Commercial Banking and Shadow Banking: The Accelerating Integration of Banks and Markets and Its Implications for Regulation

Oxford Handbook of Banking, 2nd edition, August 2013

Washington University, Saint Louis - John M. Olin School of Business Working Paper No. 13/005

46 Pages Posted: 1 Sep 2013 Last revised: 20 Nov 2013

See all articles by Arnoud W. A. Boot

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: August 30, 2013

Abstract

In this chapter we examine the implications of the increasing integration of banks and financial markets for the evolution of each as well the design of prudential regulation. The growth of the use of depository-banking-originated mortgage-backed securities sold in the market and used as collateral to back short-term funding transactions in the shadow banking sector illustrates this intertwining of banks and markets, and the potential systemic risk dangers of this, as is apparent from the recent crisis. An important implication of this integration is that it is becoming more and more difficult to isolate banking risks from financial market risks. Building on contemporary theories of financial intermediation, relationship banking and securitization, we show how these theories inform us about the underlying causes of the seismic shifts that have occurred in financial markets in recent years, and what they suggest about the kinds of regulatory reforms that may be most fruitful. We end with a list of open research questions suggested by our analysis.

Keywords: Relationship banking, financial markets, integration, shadow banking, regulation

Suggested Citation

Boot, Arnoud W. A. and Thakor, Anjan V., Commercial Banking and Shadow Banking: The Accelerating Integration of Banks and Markets and Its Implications for Regulation (August 30, 2013). Oxford Handbook of Banking, 2nd edition, August 2013, Washington University, Saint Louis - John M. Olin School of Business Working Paper No. 13/005, Available at SSRN: https://ssrn.com/abstract=2318623

Arnoud W. A. Boot

University of Amsterdam - Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4162 (Phone)
+31 20 525 5318 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Anjan V. Thakor (Contact Author)

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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