Shadow Banking in the Euro Area: Risks and Vulnerabilities in the Investment Fund Sector

The pass-through effect of unconventional monetary policy to net interest income structure of European banks

“…Banks took advantage of free funding and protected the level of their net interest margins by keeping lending rates above market interest rates. With the higher interest income, bank intermediaries would have had to cover increased regulatory costs and the risk of non-performing loans, including the loss of income from unfair competition from shadow banks (Doyle et al, 2016). Unconventional monetary policy has not helped to expand bank lending and lower commercial sector loan prices, which were the main objectives of monetary policy to support economic growth (Roengpitya et al, 2017).…”

Macroprudential regulation and leakage to the shadow banking sector

“…More precisely, we follow the institutional approach employed by ECB staff to apply the FSB broad defintion to available euro area data (Malatesta et al, 2016;Doyle et al, 2016;Bakk-Simon et al, 2012). The core of this approach depicts the use of the "Other Financial Intermediaries" (OFIs) aggregate in the Eurosystem's financial accounts data.…”

“…Also, harmonized data on MMFs The OFI sector, in line with the broad definition of shadow banks given by the FSB, covers non-MMF investment funds 49 . Whereas some studies highlight the increasing role of direct investment fund lending to the non-financial private sector in the euro area since the recent global financial crisis (Doyle et al, 2016), other studies discuss the special role investment funds play in the financial system and question the adequacy of considering these institutions as intermediaries between real economy borrowers and lenders. For instance, Bakk-Simon et al ( 2012) argue that investment funds are indeed covered by regulation, even though substantially different than commercial banks, and therefore question whether the definition of shadow banks being intermediaries outside the regulatory system…”

“…Balance sheet information on these institutions accounts for approximately 50 percent of the total OFI sector, with the rest being characterized by smaller and more heterogeneous entities. As highlighted by Doyle et al (2016), one should therefore be aware of the fact that not all institutions in the remaining half of the OFI aggregate could unambiguously be declared as shadow banks.…”

Debt-Financed Collateral and Stability Risks in the DeFi Ecosystem

“…Liquidity transformation: This activity is defined as "the use of liquid instruments to fund illiquid assets" [31], such as when hedge funds use liquid liabilities (deposits) to invest in illiquid assets such as commercial property [12]. In theory, lending platforms could accept deposits in liquid currency and provide loans in an illiquid currency, which would qualify as liquidity transformation.…”