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Shedding Light on Shadow Banking

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Shedding Light on Shadow Banking

IMF,

5 min read
5 take-aways
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Regulators shouldn’t overlook the role traditional banks play in shadow banking.

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7

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Recommendation

Recent studies suggest that the shadow banking system’s use of market-based, nondeposit funding for its activities reveals important clues about the health and relative risk of an economy. But traditional banks are also big issuers of these “noncore liabilities,” according to International Monetary Fund economists Artak Harutyunyan, Alexander Massara, Giovanni Ugazio, Goran Amidzic and Richard Walton. Their statistical research on the linkages in financial intermediation could lead to ways of identifying the early warning signals of the next financial crisis. getAbstract recommends the scholars’ broad view of shadow banking to central bankers, policy makers and regulators.

Summary

Authorities worldwide are examining the role of shadow banking in the 2008 financial crisis in an attempt to uncover how to prevent or mitigate future crises. Their approach chiefly has focused on the activities of nonregulated, nonbank financial entities, or shadow banks. However, a financial institution’s liabilities, more than its legal or regulatory framework, may offer a better gauge of potential systemic risk. In traditional banking, banks use deposits as “core liabilities” to fund their lending. When the economy expands rapidly, both banks and nonbank financial institutions ...

About the Authors

Artak Harutyunyan, Alexander Massara, Giovanni Ugazio, Goran Amidzic and Richard Walton are economists at the International Monetary Fund.

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