Demon or Angel? The Properties and Influence of Shadow Banking

As we mentioned before, the increased shadow banking system has a huge influence that cannot be ignored on the financial market. What is the remarkable properties of shadow banking? More importantly, does it stimulate  the speed of improving the financial market, or it interrupts the  stable financial system by infusing incredible risk caused by over leverage? What is the proper attitude to this naughty thing? Only through addressing these questions, we can explicitly know the shadow banking and how to manage shadow banking rationally.

Demon or angel?

Via reviewing the development history of  shadow banking in USA, it is not too hard for us to find some distinguishable characters for shadow banking. From 1960 to 1970, a credit crisis crashed USA and  some other developed countries, which was called disintermediation type credit crisis. It resulted a series of incredible crash on these countries' economy,  for instance, lack of the liquidity of institution; credit crunch; declined the variables financial firms' profitability; a huge scale of bankruptcy and so on. Due to this circumstance, the government established quite lots of reactions, which included reducing  the regulation and constraints focusing on the financial firms, this environment caused the basic character of original shadow banking which is regulation vacancy. 

However, the regulation vacancy resulted the trend of issuing variable derivatives and the dramatic increase on the scale of shadow banking, on the other hand this property also caused the incredible and invisible risk that can not be ignored. Besides, there are some other basic characteristics of shadow banking: First, the source of funds is impacted by the liquidity of capital market; Second, because the deposits are not included in their asset and liability statement, which means shadow banking is out of the traditional regulation on banking or similar institutions.Third, the lack of regulation causes the shadow banking typically has a high leverage during their operation, this property was thought as the insensitive factor for the financial crisis in 2008. 
From the normal individuals' or investors' perspective after financial crisis, shadow banking was a cancer to the healthy financial system, the diversify derivatives are the main factors causing the financial crisis. Some radical views think we should replace the shadow banking system with other financial innovations. However, from my perspective, the shadow banking  stimulates the developing of  whole capital market to some extent, especially when other traditional banking system was struggling in the specified conditions. Now the shadow banking system is continuous shrinking with the process of deleverage, but it would not be the demise, as the shadow banking is a important component in whole financial market. The future of shadow banking will be a high information disclosure and financial regulation to make sure that shadow banking can be a healthy part, this assumption has been confirmed by some government's measures. The news below just is tiny support for this proposal.

     

As above concept explained, the main characteristics of shadow banking dominate the framework of the system and cause some incredible influence on the whole financial market. Due to the special position of shadow banking, we need to consider it more cautiously and critically. So in the next post, the main risk and homologous regulation would be the topic, this may explains why shadow banking can always be under the spotlight.

Fade the Cryptic Mask of Shadow Banking

Due to the financial crisis's incredible influence on the global economy and normal individuals, the shadow banking system fades its mystery mask slowly. To some extent, the shadow banking system really accelerated the financial crisis processing. So what is a rational attitude to the shadow banking system? Should central banks or treasury adopt more regulation on monitoring shadow banking and what is the proper regulate steps?

Firstly, let's  take a little time on denote the definition of the shadow banking system, shadow banking  also can be defined as shadow financial system or shadow banking system normally. This definition was proposed by Paul Mcculley, who is the executive director of Pacific Investment Management Company. After Paul Mcculley's naming, shadow banking was received by public in past few years. Then, the Financial Stability Board (FSB) defines shadow banking as “credit inter-mediation involving entities and activities outside the regular banking system”, but other authors give complementary definitions that emphasize different aspects of shadow banking. 

For example: 

1. Adrian and Ashcraft (2012) say it is “a web of specialized financial institutions that channel funding from savers to investors through a range of securitization and secured funding techniques”. 
2.  Poszar, Adrian, Ashcraft and Boesky (2012) put special emphasis on the similitudes and differences between traditional banking and shadow banking explaining that they carry out similar functions but that “shadow banks [unlike] traditional banks lack of access to public sources of liquidity such as the Federal Reserve’s discount window, or public sources of insurance such as Federal Deposit Insurance” (reference here).

From the definition from FSB, we can explicitly find the character of shadow banking is out of regular banking system, which means it is not under the traditional banking regulation. The dramatic increase of the scale of  shadow banking was caused by incredibly attractive profit based on lack of regulation. The shadow banking system has played an irreplaceable role in the financial market.
However, comparing with the concept of traditional banking, the shadow banking is still mystery for the most individuals. Here is a video explaining what is shadow banking. 

Then, does shadow banking really murder healthy economy and what is the magnitude of the influence caused by shadow banking? Next post could explain these issues to some extent. 

First day for my blog

Hello, everyone.   It is so glad that l have a blog today.
Here is sentence that has enlighten me and hope it will give you some common sense as well:
A friend in need is a friend indeed.
One year here to study is too short for me but l still appreciate the precious chance to be together with friends who come from various countries and experience fascinating life in Queen's University Belfast.