The Economics of Shadow Banking

Manmohan Singh

collateral-plumbing-bookThe couple of decades leading up to the Lehman crisis in 2008 witnessed rapid growth in financial intermediation whereby non-banks interact with banks. Coined under the rubric of shadow banking, the banknon-bank nexus is largely seen as a form of regulatory arbitrage. However, this is an incomplete view, since there is genuine economic demand for such services. This chapter11Written for the Reserve Bank of Australias Funding and Liquidity Conference, Sydney (August 2013).attempts to explain the economics that supports the demand/supply for this market, the systemic risks that can arise and the regulatory and broader policy implications.

To formulate a policy response to shadow banking, we need to understand the nuts and bolts of how these markets work. Collateral is used in a wide range of financial transactions: secured funding (mostly by non-bank investors), repurchase agreements (or repo), and hedging (primarily with over-the-counter (OTC) derivatives). As collateral is increasingly scarce, a key shadow-banking function is to mobilise and reuse collateral to support a large volume of transactions. So there is use of capital in shadow banking in the form of margins and

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here