The shadow banking system: implications for financial regulation

Tobias Adrian and Hyun Song Shin

No 382, Staff Reports from Federal Reserve Bank of New York

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: regulatory reforms; financial architecture (search for similar items in EconPapers)
JEL-codes: G18 G28 K20 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2009-07-01
New Economics Papers: this item is included in nep-ban, nep-reg and nep-rmg
Note: For a published version of this report, see Tobias Adrian and Hyun Song Shin, "The Shadow Banking System: Implications for Financial Regulation," Banque de France Financial Stability Review 13 (September 2009): 1-10.
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