Shadow Banking System

11 Key excerpts on "Shadow Banking System"

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  Chinese Banking Reform

  From the Pre-WTO Period to the Financial Crisis and Beyond

  • Chunxia Jiang, Shujie Yao(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The shadow banking sector employs the “originate-to-distrib- ute” business model that transfers banks’ on-balance sheet regulated assets to unregulated off-balance sheets assets. Financial innovations, such as securitization vehicles, help banks evade relevant regulations. Among different definitions, the most widely used one is proposed by the Financial Stability Board (FSB) that describes shadow banking as “credit intermediation involving entities and activities outside the reg- ular banking system” (FSB 2014). 1 In a broad sense, Shadow Banking System includes all financial intermediaries other than traditional banks. In a narrow sense, Shadow Banking System refers to any institution or business that poses systemic risks due to maturity and liquidity transfor- mation, high leverage, and regulatory arbitrage, excluding those entities not part of a credit intermediation chain or not prudentially consoli- dated into a banking group. Although the definition of Shadow Banking System varies, there are commonly used criteria to distinguish shadow banking entities and activities from traditional banking institutions and services (Kodres 2013; Yan and Li 2014). The first criterion relates to maturity transfor- mation function and shadow banks refer to non-banking entities that take short-term customer funds and make long-term investments. The second criterion relates to liquidity risk and shadow banks are those non-banking entities holding insufficient liquid assets and more likely 1 FSB is an international body that monitors and makes recommendations about the global finan- cial system. FSB was established in 2009 and its original charter was endorsed by the heads of state and government of the G20. On 28 January 2013, the FSB was established as a not-for- profit association under Swiss law with its seat in Basel, Switzerland. The FSB has assumed a key role in promoting international financial regulatory reform.

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  Finance-Led Capitalism

  Shadow Banking, Re-Regulation, and the Future of Global Markets

  • Robert Guttmann(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  In a 2013 report the FSB wrote that “[T]he ‘Shadow Banking System’ can broadly be described as ‘credit intermedi- ation involving entities (fully or partially) outside the regular banking system’ or nonbank credit intermediation for short.” 3 This definition is technically correct but leaves much to be desired. Already the term “shadow banking” is perhaps mis- leading to the extent that it implies something sinister going on as in “shadowy” or, worse, “shady.” True, a significant aspect of shadow banking concerns the organized facilitation of tax evasion, money laundering, and otherwise illicit fund transfers through tax havens (e.g., Cayman Islands, Luxembourg), which, as it turns out, occurs on a rather massive scale. But this is still far from being the central SBS feature. The nearly inevitable evocation of criminality implied by the term leads me to wish for a better name. But “shadow banking” has stuck in the minds of people and become difficult to replace. 124 ● Finance-Led Capitalism Another unfortunate aspect of the FSB definition, especially in its shortened version of “nonbank credit intermediation,” is its implication that the activities comprising shadow banking are separated from traditional banking. Nothing could be further from the truth! Shadow banking activities happen by definition outside the regulated sphere of commercial banking, which is a special dimension of finance because of the fiduciary respon- sibility it implies. Commercial banks deal with other people’s money, have the power to create new money, and enjoy privileged access to the payment services of the central bank, including its crucial facilities as lender of last resort. Hence these banks are subject to special regulation and oversight.

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  Banking on Growth Models

  China's Troubled Pursuit of Financial Reform and Economic Rebalancing

  • Stephen Bell, Hui Feng(Authors)
  • 2022(Publication Date)
  • Cornell University Press

    (Publisher)

  The official definition of shadow banking appears in a State Council document, in which it is split into three categories of institutions: credit intermediation institutions that have no financial licenses and are under no regulation, such as internet-based finance and third-party wealth management institutions; institutions that do not have financial licenses and are under limited regulation, such as microcredit and finance guarantee companies; and institutions that have financial licenses but are under inadequate regulation or conduct businesses that evade regulation, such as asset securitization, money market funds, and certain types of wealth management operations (Elliot, Kroeber, and Yu 2015). In a similar vein to the definition used by the Financial Stability Board (2013, 5), perhaps the most succinct definition is by the PBC (2013, 8), which defines shadow banking as “credit intermediation involving entities and activities outside the regular banking system that serves to provide liquidity and credit transformation” and “which could potentially be a source of systemic risk or regulatory arbitrage.” The PBC’s Report on Financial Regulation in China 2014 categorizes shadow banking according to three gauges. The narrow measure is based on whether the operation is under the regulatory radar; these operations include nonlicensed businesses, such as microcredit, financing guarantee, peer-to-peer (P2P) lending, third-party wealth management, and private lending. The intermediate gauge includes the narrow gauge as well as those licensed operations outside banking intermediation, such as trust, wealth management, and bond finance

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  Shadow Banking

  Scope, Origins and Theories

  • Anastasia Nesvetailova(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  It is important to note the use of the term ‘shadow banking’ is not intended to cast a pejorative tone on this system of credit intermediation. The FSB has chosen to use the term ‘shadow banking’ as this is most commonly employed and, in particular, has been used in the earlier G20 communications. Alternative terms used by some authorities or market participants include ‘market-based financing’ or ‘market-based credit intermediation’.

  p.46

  This is the first indication that the FSB is uncomfortable with the negative connotations of ‘shadow banking’ and is aware of the existence of more neutral synonyms – ‘neutral’ of course as seen from the perspective of the banking community.

  In November 2012, the definition is extended with two crucial riders:

  The ‘Shadow Banking System’ can broadly be described as ‘credit intermediation involving entities and activities (fully or partially) outside the regular banking system’ or non-bank credit intermediation in short. Such intermediation, appropriately conducted, provides a valuable alternative to bank funding that supports real economic activity (my emphasis).

  Here, shadow banking is officially equated with non-bank credit intermediation and hence rendered harmless in a rhetorical sense. Moreover, it is presented as an alternative means of financing ‘real economic activity’ and hence as the functional equivalent to credit intermediation by banks.

  One year later, this definition is extended:

  The Shadow Banking System can broadly be described as credit intermediation involving entities and activities outside the regular banking system. Intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy, but such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions (e.g. maturity transformation and leverage) and when their interconnectedness with the regular banking system is strong. Therefore, appropriate monitoring

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  Development of China's Financial Supervision and Regulation

  • Bin Hu, Zhentao Yin, Liansheng Zheng, Bin Hu, Zhentao Yin, Liansheng Zheng(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The most authoritative description so far comes from the Financial Stability Board (FSB). It provides a broader definition of shadow banks to include all entities outside the regulated banking system that perform credit intermediation. The FSB established four fundamental features of shadow banking: maturity transformation, liquidity transformation, leverage, and credit-risk transfer. The FSB’s definition of shadow banking has gained worldwide recognition. However, since the FSB only follows the Eurozone and 25 other economies, its definition may not apply to all economies and policy frameworks. 1 Chinese researchers also have mixed views on the subject. There are three main debates. The first is whether shadow banking is subject to regulation. The second is whether it can cause systemic financial risk. The third looks at whether non-traditional credit financing is different from traditional banking. Those who agree with the FSB’s definition, according to which China’s Shadow Banking System only includes private lending and third-party wealth management on an estimated scale of 400 billion USD in 2010, believe it is a common “misunderstanding” to classify financial products and trust products as shadow banking. 2 In January 2014, China’s State Council issued a directive called the “Notice of the General Office of the State Council on Enhancing Regulation of Shadow Banking” (Document no. 107). This was regarded in various circles as the first comprehensive definition. The notice clarified three categories of shadow banking. The first are intermediaries who do not have a financial operating license and are not part of the regulation system. Independent financial advisors and Internet finance firms are examples of this. The second are those without licenses who are only partly regulated, such as credit-guarantee companies and small loan firms

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  The Shadow Banking System

  Creating Transparency in the Financial Markets

  • Valerio Lemma(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2 The Shadow Banking System as an Alternative Source of Liquidity

  This chapter considers the key economic drivers of shadow banking. It begins by examining the efficiencies of this system, that are the rationale for the bundling of activities that we define as market-based financing. The chapter goes on to take into account the market failures amplified by the shadows, focusing on asymmetric information, lack of transparency, and market instability.

  The chapter will clarify that the current legal framework allows a lawful use of business freedom, but not a means of escape from banking supervision. In this context, I address the risks related to the global nature of the shadow credit intermediation process and to its cross border transactions.

  2.1   The economic determinants of the Shadow Banking System

  It is important to develop the legal analysis of the shadow preferences

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  The Money Laundering Market

  Regulating the Criminal Economy

  • Killian J. McCarthy, Killian McCarthy(Authors)
  • 2018(Publication Date)
  • Agenda Publishing

    (Publisher)

  4   THE Shadow Banking System   Ulrich Andreas Zanconato*     4.1 INTRODUCTION

  In recent years, shadow banking has attracted increasing interest. The discussion focuses mostly on its contribution to the financing of the real economy – mainly in periods in which real bank finance dries up – and on its role as a source of systemic risk: that is, risk for the stability of the finance system (

  van der Veer et al. 2015

  ). A less researched field is the role played by shadow banking in the laundering of illicit funds. The purpose of this chapter is to shed light on the ML risk of shadow banking and offer a view on whether ML can effectively be mitigated, and to what extent it is worthwhile doing so.

  While reference is here generally made to ML, the same applies to terrorism financing too, as both utilize largely the same techniques. Terrorism financing can indeed be described as the inverse process of ML, where licit funds are diverted for the financing of illegal activities. The preparation of bribery offences also involves the diversion of licit funds into dark pools, which can later be used to bribe officials making the detection of bribery more difficult. Hence, ML means here both concealing the unlawful source of criminal gains and concealing the existence of licit funds for the purpose of preparing criminal offences.

  4.1.1 Shadow banking: a definition

  The Financial Stability Board Global Shadow Banking Monitoring Report 2015 describes shadow banking as credit intermediation involving entities and activities outside the regular banking system. It is also often referred to as “market-based financing”. A unique definition does not exist, as shadow banking activities can take very different forms across countries, and definitions focus either on the entity performing the activity or the activity itself. Until 2014, the FSB adopted an entity-based definition and, in 2015, it introduced an activity-based “economic function” measure of shadow banking, which aims to narrow the focus to those parts of non-bank credit intermediation where shadow banking risks – from a systemic risk perspective – are more likely to occur. As mentioned above, the purpose here is to analyse, not the systemic risk of shadow banking, but the ML risk residing in less regulated credit intermediaries. The shadow banking sector is thereby broadly defined here as covering non-bank financial intermediaries, besides insurance companies, pension funds and public financial institutions.1

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  The Handbook of Global Shadow Banking, Volume II

  The Future of Economic and Regulatory Dynamics

  • Luc Nijs(Author)
  • 2020(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Wide variations and deviations from the global FSB shadow banking definition occur. As a reminder that definition was ‘credit intermediation involving entities and activities (fully or partially) outside the regular banking system’. Many of the supervisors in the region interpret that FSB definition differently—that is, ‘some jurisdictions interpret “credit intermediation” in such a way to only include investment in debt instruments, while others include investments in equity or other financial assets’. 24 Nevertheless regulators in the region tend to use a set of economic criteria that seems to embody at least the philosophy of the FSB and which include ‘economic substance’, ‘credit intermediation activities’, involvement in ‘maturity/ liquidity transformation, leverage and credit risk’, ‘connectedness with the rest of the financial system’, ‘potential of creating systemic risks’, ‘potential for regulatory arbitrage’. A particular point of contention includes the inclusion of and position of NBFI within the shadow banking segment. Some supervisors don’t consider NBFIs as part of the shadow banking segment in case ‘(1) the NBFIs are subject to an appropriate regulatory regime; (2) the risks generated by their activities are not considered systemic; or (3) they do not carry out credit intermediation activities’. 25 That has led to a great variety of definitions and interpretations among Asian supervisors where the essence comes down to the delineation between those NBFIs that are part of the regular banking system and essentially considered banking institutions (credit unions, building societies) and remaining NBFIs which are only considered shadow banks where credit intermediation is involved. 5.4 A Further Examination of the Demarcation Line Between NBFIs and Shadow Banking The issue of the ‘fine line’ between NBFIs and shadow banking entities and activities didn’t go away, and so a further examination was requested

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  Preventing the Next Financial Crisis

  • Victor A. Beker(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  All these institutions had one feature in common: they were not regulated. However, they kept a close relationship with the regulated banking system. For instance, when the conduits collapsed, the commercial banks took a huge hit because they owned or sponsored 270 out of the 300 or so operating in 2007. While the commercial banks had given a 100% guarantee to their conduits, they had made no corresponding capital provision for the conduits’ extensive $1 trillion plus assets (Lysandrou and Nevestailova, 2014: 18).

  The two parts of the financial system are closely linked through a network of securities lending, repos and derivatives markets. Regular banks are big players in the Shadow Banking System, both as collateral providers and as repo participants. Apart from this direct linkage, the risks taken by the shadow banks can also spread to regular banks via indirect channels, such as the massive sale of assets that could cause the decrease of prices of financial and real assets, as happened in 2007/2009. This deep interconnectedness between the Shadow Banking System and the regular banking system explains why a crisis originated in the Shadow Banking System had such a formidable impact on many institutions belonging to the regulated one.

  As Lord Adair Turner, chairman of the UK’s Financial Services Authority during the crisis, observed: “We need to understand shadow banking not as something parallel or separate from the core banking system, but deeply intertwined with it” (Turner, 2012).

  In the same sense, Governor Daniel Tarullo referred to the shadow banking activities asserting that “regulated institutions are in fact heavily involved in these activities, both in funding their own operations and in extending credit and liquidity support to shadow banks beyond the regulatory perimeter” (Tarullo, 2013).

  The traditional view of the banking system has been that its main funding is provided by household and small- to medium-sized business demand deposits. However, the presence of the Shadow Banking System allows leverage to rise quickly in both individual banks and the banking system as a whole. Banks intensified their reliance on other financial institutions for funding, increasingly relying on the wholesale capital markets for repos and commercial paper. As a consequence, funding to banks was increasing during the pre-crisis period until it involved much more than just households and their deposits.1

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  Shadow Banking in China

  An Opportunity for Financial Reform

  • Andrew Sheng, Ng Chow Soon(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  In exploiting regulatory gaps and arbitrage, shadow banking can blunt regulatory policy and tools. For example, the credit provided to the real estate sector through shadow banking can offset the effects of macro prudential controls on bank lending to prevent a real estate bubble. On the other hand, by providing higher deposit rates to savers and returns to investors, shadow banking can reduce financial repression and inequality and alleviate the unintended consequences of official policies on controlled interest rates.

  Furthermore, an unintended consequence of regulatory policy is the considerable difference in financing costs between SOEs and private firms, especially SMEs. Shadow banking can arbitrage out these differences, but at the same time blur the risks between the shadow and formal banking sectors by binding these risks through cross-holdings of WMPs.

  4.6.1.3 Impact on Financial Stability

  The rapid growth in shadow banking and lack of transparency has increased the potential risks to systemic stability.

  Shadow banking credit activities have not necessarily added credit risks to sectors that already suffer from overcapacity, operating losses or are essentially non-viable. But being less transparent, and having bundled these risks into WMPs, the risks are now transmitted to the formal banking system. Resolution of these risks will, therefore, involve sorting out the economic viability, liquidity and solvency of the underlying borrowers, and clarifying the embedded maturity transformation, liquidity transformation, credit transformation and leverage within the entire financial system.

  4.6.1.4 Impact on Mainstream Banking System

  Shadow banking has challenged the traditional deposit-taking business model of commercial banks. Such challenge, however, has promoted the banking reform process and interest rate liberalization. Banks are now reconsidering their business model in the face of the challenges of both technology (e-finance) and market competition from shadow banking institutions.

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  Shadow Banking and the Rise of Capitalism in China

  The Rise of Capitalism in China

  • Andrew Collier(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  87 © The Author(s) 2017 A. Collier, Shadow Banking and the Rise of Capitalism in China, DOI 10.1007/978-981-10-2996-7_7 CHAPTER 7 The Banks Jump into Shadow Banking In the summer of 2012, I was sitting in an upscale Japanese restaurant in the pleasant city of Fuzhou on the coast of the East China Sea facing Taiwan, sipping beer with a top executive of a state-owned bank. As he munched on sushi, he complained about the competition his bank faced from the new Shadow Banks, including Trusts and online finance com- panies. He was worried about how his branch, which was the main head- quarters for the entire province of Fujian, would survive against the rising competition from Shadow Banks. The Shadow Banks were starting to eat away at the market share of the big state banks. In retaliation, “We have to begin offering wealth management products or we are going to lose our depositors,” he told me. His comment was a surprising admission of the declining influence of the once all-powerful state banks—and the role played by Shadow Banking. Although many people view China’s financial system as a monolith run by a few mandarin officials in Beijing, down in the trenches it’s a much more dog-eat-dog universe—and the four state-owned banks are no exception. The comment by the executive was an acknowledgment that the prim and proper state-owned banks had found themselves dragged, like logs down a river, into the muck of Shadow Banking. As the IMF noted: Because banks played a major role in financing the expansion, the economic downturn has imposed a significant burden on banks’ balance sheets, driving banks to expand off-balance-sheet business, both to circumvent stringent 88 regulation on capital and liquidity, and to tap into new clients and asset classes that are restricted by the current regulation. (Liao et al. 2016b) But this, in fact, was a journey that had been going on for a long time.

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