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The Shadow banking sistem

The Shadow banking sistem. F. LEONE, l. pesce. Definition. If it looks like a duck, quacks like a duck, and acts like a duck, then it is a duck—or so the saying goes. But what about an institution that looks like a bank and acts like a bank? Often it is not a bank—it is a shadow bank.

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The Shadow banking sistem

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  1. The Shadow banking sistem F. LEONE, l. pesce

  2. Definition • If it looks like a duck, quacks like a duck, and acts like a duck, then it is a duck—or so the saying goes. But what about an institution that looks like a bank and acts like a bank? Often it is not a bank—it is a shadow bank. • source:Laura E. Kodres, Finance & Development

  3. The reason of pursuing • On the demand side shadow banking grows because instituional investor demands deposits like instrument to manage their cash- balances. source : Financial stability board

  4. On the offering size there are two reasons why financial institutions are interested in shadow banking. • The first reason is the search for yield on the banks side. This process has transformed banks from being low return on-equity (RoE) utilities that originate loans and hold and fund them until maturity with deposits, to high RoE entities that originate loans in order to securitize.

  5. Securitization can be valuable in different ways: · Securitization involving real credit risk transfer is an efficient way to share risks. The loan originator (the traditional bank) can limit concentrations to certain borrowers, loan types and geographies on its balance sheet by transferring these loans to diversified investors.

  6. · Securitization allows traditional banks to conserve capital (transform illiquid assets into cash and use cash to make more loans) and realize economies of scale from their expertise in loan origination and monitoring that are not possible when required to retain loans on balance sheet.

  7. · Securitization is a valuable way to involve the market in the supervision of banks. It can provide third-party discipline and market pricing of assets that would be opaque if left on the banks’ balance sheets.

  8. The second reason is trying to escape banking regulation and, in particular, capital requirements. Through the use of structured finance vehicles and financial holding companies banks were able to increase their leverage, which increased their expected returns but also their exposure to aggregate risks.

  9. Activities Involved • Shadow banks includes all entities outside the regulated banking system that perform the core banking function, credit intermediation. The four key aspects of intermediation are: • maturity transformation: obtaining short-term funds to invest in longer-term assets; • liquidity transformation: a concept similar to maturity transformation that entails using cash-like liabilities to buy harder-to-sell assets such as loans; • leverage: employing techniques such as borrowing money to buy fixed assets to magnify the potential gains (or losses) on an investment; • credit risk transfer: taking the risk of a borrower’s default and transferring it from the originator of the loan to another party.

  10. The SBS sector can be split into nine major sub-sectors of varying significance • The largest sub-sector, representing $21 trillion and 35% of assets of SBS’ in 2012, was that of ‘other investment funds’, which includes funds other than MMFs or hedge funds.

  11. Broker-dealers were the second largest identified sub-sector with $7 trillion of assets corresponding to 12% of SBSs. At the end of 2012, the sector was essentially concentrated in the UK (39%), US (28%), Japan (21%), Canada (6%) and Korea (4%).

  12. Structured finance vehicles are the third largest sub-sector. Total financial assets were $5 trillion at the end of 2012, corresponding to 8% of SBS. The sector was concentrated in the US (35%) and the UK (13%).

  13. Finance companies and money market funds made up 8% and 6% of total SBS assets, respectively, corresponding to $4.5 trillion and $3.8 trillion. Money market funds are mainly concentrated in the US and the euro area, which together represented almost 80% of all money market funds globally at the end of 2012.

  14. Hedge funds were the smallest sub-sector, making up only $0.1 trillion, according to information submitted by jurisdictions for the macro-mapping.

  15. The remaining part of the SBS sector is represented by jurisdiction-specific entities such as Dutch Special Financial Institutions (SFIs) US funding corporations, and US financial holding companies. • source: Global Shadow Banking Monitoring Report 2013, FSB

  16. PROPAGATION AND DIMENSION • Non-bank financial intermediation in a broad sense continued to grow in 2012. • As a share of total financial intermediation, non-bank financial intermediation has been broadly steady over recent years at about 24%, below the level seen at the onset of the crisis.

  17. The size of non-bank financial intermediation was equivalent to 117% of GDP in aggregate at the end of 2012 for 20 jurisdictions and the euro area, which is still well below the peak level of 125% in 2007.

  18. Country share of OFI:

  19. Detail Of Europe: Source: SBS in the Euro area, by KlaràBakk-Simon

  20. The US had the largest system of non-bank financial intermediation at the end of 2012 with assets of $26 trillion, followed by the euro area ($22 trillion), the UK ($9 trillion) and Japan ($4 trillion). Source GDP: Trading economics.com

  21. Reason of regulation • Shadow banking can potentially increase economic efficiency.

  22. ☐ Shadow banking’s disintermediation likely increases economic efficiency.

  23. ☐ Another way to increase efficiency by SBS is decentralization.

  24. Because of the potential to increase efficiency, regulation should necessarily be focused minimizing shadow banking’s potential to increase systemic risk, but how ?

  25. Interconnectedness between banks and non-bank financial entities • Systemic risk can arise from the interconnectedness between shadow banking entities and the banking sector. For example direct linkages are created when shadow banking entities form part of the bank intermediation chain, are directly owned by banks, or benefit directly from bank support (explicit or implicit). Funding interdependence is yet another form of direct linkage, as is the holding of each other’s assets such as debt securities.

  26. In addition indirect linkages also exist, as the two sectors may invest in similar assets or be exposed to a number of common counterparties. These connections create a contagion channel through which stress in one sector can be transmitted to the other, and can be amplified back through feedback loops.

  27. So the real way to contrast the shadow banking system is not a strict regulation but we must search a way to control theinterconnectedness between bank and shadow bank activities.

  28. Thank you all for your attention • Francesco Leone • Lorenzo Pesce

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