Types Of Shadow Banking : An Overview Essay

Now, many of these banking groups are owned by foreign investors, despite attempted safeguards. This ownership has provided investors leverage and influence over the actions of the government because the government owes an exorbitant amount to these banks (Daniel Lederman). The same argument can be made about the United States’ government. This influence can be seen across the board as many decisions now seem to favor only a select few, forgetting about the ramifications for the many.

Differences in banking regulations across borders permit the most efficient channeling of funds from lenders to borrowers, leading to increased investment and thus increased GDP. Therefore it is imperative that policy makers prudently evaluate the possible consequences and benefits of harmonized banking regulations, as demonstrated by similar regulations instituted domestically, before any such endeavor is embarked upon.

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

The shadow banking system can be approximately defined as “the system of credit intermediation that includes objects and activities outside the regular banking system”. Its form is correlated to the way in which the banking sector and the

This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

In this essay I am going to discuss the effects of shadow banking on the recent financial crisis of 2007-8. Shadow banking was one of the major causes of the financial crisis since it was the subprime mortgages which was the first trigger of the collapse in the banking system. Through this essay I am to achieve a detailed analysis of why the shadow banking was one of the causes in the financial crisis and why was it not prevented by any regulation enforced. The basis of shadow banking system is that it occurs when financial intermediaries conduct transformation of maturity, credit and liquidity without having access to the central bank liquidity guarantees or even public sector credit. Maturity transformation: obtaining short-term funds to

Housing prices in the United States rose steadily after the World War II. Although some research indicated that the financial crisis started in the US housing market, the main cause of the financial crisis between 2007 and 2009 was actually the combination of housing bubble and credit boom. The banks created so much loan that pushed the housing price to the peak. As the bank lend out a huge amount of money, the level of individual debt also rose along with the housing price. Since the debt rose faster than people’s income, people were unable to repay their loan and bank found themselves were in danger. As this showed a signal for people, people withdrew money from the banks they considered as “safe” before, and increased the “haircuts” on repos and difficulties experienced by commercial paper issuers. This caused the short term funding market in the shadow banking system appeared a

For many years the major banks have been used by the government as pools of unlimited capital for the country’s state owned enterprises (Yan, 2013). With the use of the implicit government guarantees the government prevents the large state owned enterprises from defaulting on their loans (Yan, 2013). This makes it possible for the state enterprises to acquire a large quantity of loans as they are considered a safe debtor by the

It is argued that in the case of the subprime crisis, transmission occurred through direct linkages (Reinhart and Rogoff 240). These direct linkages were first of all, the “nontrivial” exposure of non-US financial institutions to the US subprime mortgage market. Secondly, there were common characteristics in various countries at the start of the crisis. Two important ones being real estate bubbles in many European countries, and large current account deficits in numerous countries as varied as Bulgaria, Iceland, Ireland, Latvia, New Zealand, Spain and the United Kingdom (Reinhart and Rogoff 244). Thirdly, various countries were not only exposed to the US subprime market, but also had common lenders with US financial institutions (Reinhart and Rogoff

A special attention deserves an estimation of forward-looking PDs. This could be challenging since many financial institutions lack a reliable information and systems (Grunberger, 2014 as cited in Z. Novotny-Farkas, 2016). According to Global Public Policy Committee (June 2016), many banks plan to use PDs not only for estimation of the ECLs but also for identifying the ‘significant increase’ in credit

According to the Federal Deposit Insurance Corporation (FDIC), the number of bank branches shrinks dramatically after the crisis. A total loss of 7, 689 bank branches occurred from 2009 to 2016. Figure \ref{f: map} shows the gain and loss of bank branches in the U.S. counties. In the local lending markets, banks used to act as the key financial intermediaries. A well developed banking network eases access to credit, which benefits the local economy by eliminating poverty (Burgess and Pande 2005) and activating the labor markets (Bruhn and Love 2014). However, the use of credit score and the development of secondary market reduces the importance of lender-borrower distance in local credit supply markets (Petersen and Rajan 2002; Berger

A banking fraud is the use of illegal means to gain money, assets from depositors or clients fraudulently while posing as a bank, agent or any other financial institution. In many countries and especially the United States, bank fraud is a criminal offense even though experts refer to it as a white collar crime due to the manner in which it is carried out. The paper below will look at the vulnerabilities that face the banking industry while using the example of Stanford Financial Group Company to show how the banking fraud can be committed. Moreover, the paper will also look at the different frauds that can be committed in the banking sector and how the vulnerabilities can be avoided. A fraud prevention program will also be created meant to help companies in the banking industry prevent and detect crimes and frauds before they occur (Riggs, 2007).

With the increasing competition on the balance sheet both between banks and from non-banks financial institutions, banks have diversified their product into non-intermediary financial services as a result. One of the results of this has been the remarkable growth in the percentage of off-balance-sheet (henceforth OBS) activities. Generally, OBS item refers to an asset or debt that does not appear on the banks’ balance sheet, e.g. standby letters of credit, currency and interest rate swaps etc. In the last two decades, with the deregulation of the financial markets and improvement in financial innovations, banks are encouraged to offer new financial products and services to increase their profit (Jurman, 2005). Actually, decreasing profitability of traditional banking and increasing competitiveness of markets force banks to undertake OBS activities. Therefore, banks have expanded OBS activities dramatically, not only on the volume of ‘traditional’ OBS items, but also the use of risky innovations (Khambata and Hirche, 2002). The data of European commercial banks shows, the OBS activities increased from less than 50% of total outstanding loans in the early 1990s to 150% of loans in the early 2000s. A similar trend has also occurred among commercial banks in the United States (Bos and Kolari, 2013). Specifically, on the one hand, as we can see from table 1, the share of OBS activities have been growing dramatically among sample developed markets’ banking industry. On the other

A number of researches state that firm size, firm’s quality and loan quality have important effects on the number of bank relationship (Petersen and Rajan, 1994; Ongena and Smith, 2000; Detragiach et al, 2000). Banks diversify the risk by reducing their loan exposure to individual enterprises and widen the loan portfolio to more firms. Large firms usually require an extensive banking relationship in order to meet firm specific needs, which are more

List of abbreviations List of tables Acknowledgements Abstract 1. 2. 3. 4. 5. 6. 7. 8. Introduction Problem statement Objectives and hypothesis of the study Literature review Structure and performance of the financial sector in