SHADOW BANKING

Eszter Baranyai
MNB Department
Corvinus University of Budapest

September, 2018
My background

■ Bank of England:
– Markets (senior analyst in market intelligence team)
– Financial Stability (senior analyst in non-bank and markets team)
– Bank supervision (senior associate in liquidity risk support team)
■ Financial Services Authority
– Bank supervision (senior associate in liquidity risk support team)
■ Barclays Bank
– Liquidity risk management (analyst in group liquidity risk
management team)
Course objective

■ An understanding of the global financial eco-system

■ Structured approach to thinking about risks
■ Enhance logical thinking and reasoning skills
Course structure

■ Introduction
■ Shadow banking activities: repo, securitisation
■ Shadow banking entities
■ Shadow banking and the financial eco-system, the money view
■ US crisis: the world of the alphabet soup
■ Bank-based versus market-based financial systems
■ Relevance for financial stability, monetary policy and market regulators
■ Shadow banking in China
■ Regulatory developments
■ Fintech in the context of shadow banking
Assessment

■ Class activity up to 60 points

– Ask questions, make comments, participate in debates, prepare for
classes
– No such thing as a bad question or comment
■ Presentations up to 61 points
– List of possible topics will be circulated next week
– Form groups of 3, each presentation to be ~10 minutes + 5 minutes
question/ discussion time
– Presentations will take place from 24 Oct to 12 Dec
■ Grade based on the above two OR a written exam
Source: The Illustrated London News,
1888
What is shadow banking?

■ FSB:
– credit intermediation involving entities and activities (fully or partially) outside the regular
banking system
■ IMF:
– financial intermediaries or activities involved in credit intermediation outside the regular banking
system, and therefore lacking a formal safety net
■ Others:
– All financial activities except traditional banking, requiring private or public backstop to operate.
– For China: All financial instruments that fulfil functions of credit intermediation typically performed
by banks (such as liquidity, maturity, and credit risk transformation), but reduce the burden of or
bypass banking regulation.
– Entities that conduct maturity, credit, and liquidity transformation without government guarantee
or access to central bank liquidity.
■ Narrow and broad definition
■ Market-based finance
FSB: shadow banking narrow
definition
Classification by economic functions

Source: FSB Global Shadow banking monitoring report

 The financial system
Evolution of shadow banking by economic Breakdown by main entity types (end-2016)
function

Source: BdF Financial Stability Report

 Financial Stability Board
■ The FSB was established in 2009 to promote financial stability
and address faultlines exposed during the crisis.
■ It brings together national authorities responsible for financial
stability in 24 countries and jurisdictions, international financial
institutions such as the IMF, sector-specific international
groupings of regulators and supervisors, and committees of
central bank experts.
■ The FSB coordinates among its members with a view toward
developing strong regulatory, supervisory and other financial
sector policies.
 Policy background
■ G20 mandate to address the financial stability risks from
shadow banking and transform it into resilient market-based
finance
■ FSB global shadow banking monitoring
■ Policy measures
■ Claim: the most toxic parts of shadow banking declined
significantly – the system is safer
■ But rapid rise of CIVs – hence focus on asset management
The financial system
Total financial assets (USD trillion) Share (%)

Source: FSB Global Shadow banking monitoring

report
Annex: shadow banking and FSB
figures
Investor types

Source: FSB Global Shadow banking monitoring report

Notes: MUNFI (Monitoring universe of non-bank financial intermediation) includes OFIs, pension
funds, insurance companies and financial auxiliaries.
21 jurisdictions and the euro area
Financial systems across the globe
Advanced economies (% GDP) EMEs (% GDP)

Source: FSB Global Shadow banking monitoring report

Other financial institutions: growth
Annual growth of OFIs

Source: FSB Global Shadow banking monitoring report

Shadow banking by jurisdiction
FSB Narrow definition of shadow FSB Other financial institutions
banking (%) (%)

Source: FSB Global Shadow banking monitoring report 2017. Data for
end-2016. KY= Cayman Islands.
Drivers of growth

■ Regulation of banks?
■ Banks’ risk appetite
■ Financial innovation
■ Ample liquidity
■ Search for yield
■ Supply and demand factors for high-quality securities
Source: IMF
Advantages of shadow banking/
market-based finance
■ Access to credit
■ Support market liquidity
■ Enable risk-sharing
Risks of shadow banking

■ Run risk
■ Agency problems
■ Opacity and complexity
■ Leverage and pro-cyclicality
■ Spillovers via direct links and asset prices
Financial stability risks
Financial stability risks – examples
of risk metrics