Shadow Banking A Form Of Regulatory Arbitrage - 1185 Words

Shadow banking can be seen as a form of regulatory arbitrage that provides important financial intermediation functions distinct from those preformed by banks and capital banks [Claessens et al (2012)]. Some of these functions include securitization and collateral intermediation both of which we have partially discussed. One thing that should be pointed out is that, contrary to its name; shadow banking is not completely unrelated to conventional banking. For instance, shadow-banking complements traditional banking by expanding access to credit or by supporting market liquidity, maturity transformation and risk sharing [Nico Valckx et al]. The only major difference between the two banking systems is that shadow banking is not regulated.†¦show more content†¦The shadow banks responded to this by trying to issue new securities and force selling the underlying collateral. However due to the aforementioned slump in mortgages and real estate prices, this response failed and the va lue of these repurchase agreements continued to decline whilst the haircuts continued to increase. Due to this, lenders refused to offer short-term loans whilst haircuts grew to new highs. This meant that repo lending drastically decreased and lead to the collapse of the shadow banking system. To highlight the extremity of the above scenario, Figure 2 shows the drop in the US repo market before and after the 2008 recession [Financial Times (2013)] [Figure 2]. In retrospect, due to the above events, regulators became concerned by the use of repo agreements and the simultaneous use of haircuts in these agreements. These regulators were concerned that haircuts would amplify negative market trends and in situations where asset prices were falling, the increases in haircuts in response to the loss of confidence in an asset could reduce the liquidity of market users who may then sell assets, and so reducing the price of the asset and causing the haircuts to further increase [ICMA]. They believe that this scenario contributed greatly to the current financial recession. However, there are some arguments against thisShow MoreRelatedBasel Norms2920 Words   |  12 Pagesof the Basel Accord in 1998 and how it has evolved over the course of the last 23 years. Contrary to the popular belief capital regulations have been considered the biggest underlying factor of the subprime crisis owing to securitization, the shadow banking system and the flexibili ty given to banks in risk assessment. The recent Basel III norms though aim to mitigate the already caused damage, the results are still left to be witnessed. Evolution of Basel Norms and their contribution to the SubprimeRead MoreShadow Banking29874 Words   |  120 PagesFederal Reserve Bank of New York Staff Reports Shadow Banking Zoltan Pozsar Tobias Adrian Adam Ashcraft Hayley Boesky Staff Report no. 458 July 2010 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errorsRead MoreEvaluating Basel10414 Words   |  42 Pagesrole in the safety and soundness of individual banks and the banking system. Role of bank capital: †¢ Source of funds – Start-up costs – Growth or expansion (mergers and acquisitions) – Modernization costs †¢ Cushion to absorb unexpected operating losses – Insufficient capital to absorb losses will cause insolvency – Long-term debt can only absorb losses in the event of institution failure †¢ Adequate capital – Regulatory requirements to promote bank safety and soundness – MitigateRead MoreThe Dodd-Frank Wall Street Reform and Consumer Protection Act1561 Words   |  7 PagesStreet Reform and Consumer Protection Act brought the most significant changes to financial regulation in the United States since the reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation’s financial services industry. Like Glass-Steagall, the legislation passed after the Great Depression, it sought to regulate the financial markets and make another economicRead MoreIntroduction: The financial sector has been hit badly by the financial crisis in 2008. The1600 Words   |  7 Pagesby forcing each financial institution to hold an adequate percentage of capital to act as a buffer against liquidity problems faced by those institutions (Benink, Wihlborg 2002). Basel 1: The Basel Committee on Banking Supervision started Basel 1 Accord in 1988 to stabilize the banking system by ensuring that banks maintains capital not less than 8% of its credit risk (Hussain, Ramzan et al. 2012) in (Hasan 2002). Where credit risk is the risk associated with the default of a borrower to pay hisRead MoreBanking, Liquidity and Bank Runs9201 Words   |  37 PagesBanking, Liquidity and Bank Runs in an In†¦nite Horizon Economy Mark Gertler and Nobuhiro Kiyotaki NYU and Princeton University May 2012 Abstract We develop a variation of the macroeconomic model of banking in Gertler and Kiyotaki (GK2011) that allows for household liquidity risks and bank runs as in Diamond and Dybvig (DD1983). As in GK, because bank net worth †¡ uctuates with aggregate production, the spread in the expected rates of return on bank credit and deposit †¡ uctuates countercyclicallyRead MoreFinancial System Between Australia and Singapore8919 Words   |  36 Pagesis known as the Monetary Authority of Singapore (MAS). Earlier in 1970, Singapore started to growth and there was increasing need of a better banking and financing environment. Hence in 1970, the MAS Act was passed by the parliament of Singapore. In 1st January 1971, MAS was formed with the MAS Act giving it the power to regulate every element in the banking aspects of Singapore. MAS then take over the task to regulate the insurance industry in April 1977 and the function of Security Industry inRead MoreEurope Economic Crisis55278 Words   |  222 Pageshistory of the European Union. Although signs of improvement have appeared recently, recovery remains uncertain and fragile. The EU’s response to the downturn has been swift and decisive. Aside from intervention to stabilise, restore and reform the banking sector, the European Economic Recovery Plan (EERP) was launched in December 2008. The objective of the EERP is to restore confidence and bolster demand through a coordinated injection of purchasing power into the economy complemented by strategicRead MoreThe Impact of Business Ethic on Organisational Performance14958 Words   |  60 Pageswhile ensuring that essential action plans are taken that ensures that the organisational systems and processes are well aligned with it ethical dispositions and ethos. Below is the ‘Obligations of Senior Financial Officers’ excerpted from the banking group’s codes of conducts: |â€Å"HSBC Group Business Principles and Values is applicable to all HSBC employees and sets out the fundamental standards to be followed by | |them in their everyday actions on behalf of the Company. In addition to the GroupRead MoreInside the Meltdown49737 Words   |  199 Pagessuccessfully. We have seen a lot of stability. People are keeping their money in banks, which is good. ... I think we ll be judged by how history judges us, whether we continue to be effective in trying to stabilize the banking sector and maintaining people s confidence in the banking system. ... You say in speeches that the FDIC and yourself saw a storm brewing over the last two years. ... When I came to the agency, we were still in a very benign economic environment, but the FDIC staff, our supervisors