Traditional and Shadow Banks During the Crisis

A new Glass-Steagall Act would break up universal banks and end the conflicts of interest that prevent universal banks from acting as objective lenders and impartial investment advisers. It would produce a more stable and resilient financial system by reestablishing structural buffers to prevent contagion between the banking system and other financial sectors. It would improve market discipline by preventing banks from transferring their safety net subsidies to affiliates engaged in capital markets activities. It would shrink the shadow banking system by prohibiting nonbanks from issuing short-term financial claims that function as deposit substitutes. It would remove the dangerous influence that large financial conglomerates exercise over our political and regulatory systems. It would end the current situation in which our financial system and our economy are held hostage to the survival of universal banks and large shadow banks. It would restore our banking system and financial markets to their proper roles as servants—not masters—of nonfinancial business firms and consumers.

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An Empirical Study about Influence of China’s Shadow Banking on the Stability of the Financial System

International Journal of Economics and Finance ◽

10.5539/ijef.v8n4p104 ◽

2016 ◽

Vol 8 (4) ◽

pp. 104 ◽

Cited By ~ 1

Author(s):

Bo Liu ◽

Shuai Shao ◽

Yan-yang Gao

Keyword(s):

Evaluation System ◽

Rapid Development ◽

Risk Index ◽

Financial System ◽

Fuzzy Comprehensive Evaluation ◽

Entropy Method ◽

Response Analysis ◽

Shadow Banking ◽

Shadow Banks ◽

The Stability

<p class="1"><span lang="EN-US">With the rapid development of the financial system in recent years, all kinds of financial derivatives teem and the size of the shadow banking is becoming more and bigger. It has become an important factor affecting the stability of China’s financial system. The influence of shadow banks on the financial system has two sides, on the one hand it is advantageous to the development and expansion of small and medium-sized enterprises as lubricant of corporate financing, on the other hand, features of shadow banking that highly leveraged and term mismatch also bring uncertainty to China’s financial system. Firstly, this paper calculates the size of the shadow banking in China, and then builds a fuzzy comprehensive evaluation system to evaluate the risk of China’s financial system. When determining the evaluation index, this paper apply KMV model to calculate the credit risk of China’s securities market, and the maximum entropy method to determine the index weight. After getting China’s financial system risk index and the size of shadow banking, this paper constructs the VAR model and makes the parameter estimation and impulse response analysis. Analysis results show that in a certain degree, the increase of the scale of shadow banks can reduce the risk of the financial system, but if it is over some certain threshold, it will increase the overall risk of the financial system.</span></p>

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Bank Cleanups, Capitalization, and Lending: Evidence from India

Review of Financial Studies ◽

10.1093/rfs/hhaa119 ◽

2020 ◽

Cited By ~ 1

Author(s):

Yakshup Chopra ◽

Krishnamurthy Subramanian ◽

Prasanna L Tantri

Keyword(s):

Information Asymmetry ◽

Risk Shifting ◽

Real Economy ◽

Economic Stability ◽

The Real ◽

Quality Review ◽

Shadow Banks ◽

Zombie Lending ◽

Asset Quality ◽

The Impact

Abstract We examine the Indian bank asset quality review, which doubled the declared loan delinquency rate. Relative economic stability during the exercise and the absence of a capital backstop together make it unique. We find that the expected reduction in information asymmetry does not automatically lead to the recapitalization of banks by markets. The consequent undercapitalization leads to underinvestment and risk-shifting through zombie lending. The impact flows to the real economy through borrowers, including shadow banks, and adversely impacts growth. These findings show that bank cleanup exercises not accompanied by policies aimed at recapitalization may be insufficient even during normal times.

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Monetary Transmission through Shadow Banks

Review of Financial Studies ◽

10.1093/rfs/hhz112 ◽

2019 ◽

Vol 33 (6) ◽

pp. 2379-2420 ◽

Cited By ~ 4

Author(s):

Kairong Xiao

Keyword(s):

Monetary Policy ◽

Banking Sector ◽

Structural Model ◽

Shadow Banking ◽

Oxford University ◽

Shadow Banks ◽

Bank Deposits ◽

The Difference ◽

Pass Through ◽

The Impact

Abstract I find that shadow bank money creation significantly expands during monetary-tightening cycles. This “shadow banking channel” offsets reductions in commercial bank deposits and dampens the impact of monetary policy. Using a structural model of bank competition, I show that the difference in depositor clienteles quantitatively explains banks’ different responses to monetary policy. Facing a more yield-sensitive clientele, shadow banks are more likely to pass through rate hikes to depositors, thereby attracting more deposits when the Federal Reserve raises rates. My results suggest that monetary tightening could unintentionally increase financial fragility by driving deposits into the uninsured shadow banking sector. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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