Shadow Banking and Market-Based Finance

On Shadow Banking and Financial Frictions in DSGE Modeling

“…Several assumptions explain this misjudgement of which we focus on two. 4 One traces back to the work of Modigliani and Miller (1958) and postulated a separation of the macro sphere from …nancial aspects. In their theorem on the "irrelevance of …nancing structure", they proposed that given an e¢ cient market, the external value of a …rm is not a¤ected by its …nancing structure, i.e.…”

“…A detailed review on the evolution of …nancial frictions is extensively laid out by Quadrini (2011), Duncan and Nolan (2017) or Claessens and Kose (2017) 4. Another assumption rests on the hypothesis of e¢ cient capital markets byFama (1970).…”

Structural developments in global financial intermediation: The rise of debt and non-bank credit intermediation

“…22 Another paper highlights the differences in risks of securitisation and other forms of opacity and lengthy credit intermediation chains, with less opaque or complex forms of market-based financing such as asset management. 23 For these reasons, in a major crisis, more transparent forms of market-based finance might therefore be expected to be a materially less disruptive way of passing very substantial losses back to end investors than bank lending, as it pertains to financial stability. However, that does not imply that growth and development of some forms of market-based finance in recent years are without financial stability risks due to the potential for amplification and contagion of risks.…”

Leverage-A Broader View

“…4 Thus, our understanding of the pledged collateral market, relative to money, needs to be enhanced, or else we risk underestimating the sources of lubrication in the markets. A similar case could be made for wealth-management products (Adrian, 2017), since many of these transactions/products do not make it to the balance sheet. However, this paper restricts the analysis only to the pledged collateral market.…”

“…The remainder relates primarily to settle …trading portfolio…"[£34 billion is in trading portfolio, page 192 of the 2016 Annual report]. Leverage issues for financial stability stem largely primarily from the 20-30 GSIBs-and not from all banks-that have a global footprint in niche transactions such as peddling pledged collateral or wealth management products, that may not be on the balance sheet (IMF, 2014;Adrian, 2017). Furthermore, there is sizable dispersion between the extent of off-balance sheet use (that does not come to balance sheet) within these GSIBs, such as pre-crisis Lehman and UBS to present-day Barclays, JP Morgan and recently some Asian banks.…”