The Size Of The Shadow Banking

1367 WordsMay 15, 20156 Pages
The Size of the Shadow Banking: A Review of the Literature and Measurements in New Zealand 1. What is a “shadow bank”? The notion of “shadow bank” put forward by economist Paul MaCulley in 2007. Rephrasing McCulley (2009), shadow banks refer mainly to non-bank financial intermediaries, including broker-dealers, hedge funds, private equity groups, investment bank, structured investment vehicles (SIVs), conduits, CDO structures, money market funds, non-bank mortgage lenders and other similar entities, which engage in maturity transformation, that is raising (mostly borrowing) short-term funds in the money markets and using them to buy assets with long-run maturities. These transactions are in the “shadows” because they are not subject to traditional bank regulation. Also, they cannot—as commercial banks can—borrow in an emergency from the Reserve Bank and do not insure these funds. 2. Why is shadow banking system important? Shadow banking is the inevitable creation of economic development. It brings liquidity, flexibility and credit risk transformation to the financial market. On the other hand, shadow banks can do harm to economy because of their inherent defects—asset quality, funding fragility and liquidity mismatch (Adrain & Ashcraft, 2012). In 2008, shadow banks played a massive role in propelling the global financial crisis, which was “the worst financial crisis since Depression” (IMF, 2008). Since the size of shadow banking system is related to financial stability, the
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