I began writing in this space in 2010 in response to the tidal wave of regulatory proposals relating to the securitization industry which emanated from the Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA). Following the initial flurry, and a few follow-ups, there has been a relatively long period of regulatory silence. During that downtime, I have been searching for more general topics of interest, a search which eventually led me to a large body of macroeconomic literature on the topic of shadow banking. Having no economics background, this proved tough sledding for a while until I developed a hard and fast rule of disregarding anything that resembled pages from a statistics or calculus text book. So readers should be forewarned about what follows: it requires no expertise to understand and certainly drew upon none in its composition other than that adopted, liberally, from sources intelligible to a non-expert. I leave it to readers to decide whether this is a shortcoming or a strength.
Once immersed in these materials, I quickly became aware of how narrow was much of the commentary on the specific proposals, including my own. I became convinced that, unless one has a firm grasp on the policy behind the proposals, and the theory which sustains that policy, commenting on the details of this or that proposal without regard to the policy is of limited value. Sure, certain requirements may be onerous on one industry participant or another and result in less available credit or slower growth. But the simple truth of the matter is that, unless we take the view that nothing went wrong and nothing needs to be fixed, someone's ox is bound to get gored here and we have to choose whose it is to be based on sound public policy reasons. And the policy reasons go deep, all the way back to the nature of money and its role in the financial world, and can only be understood in that context.
For purposes of what follows, I adopt the definition of money or money-equivalents proposed by Morgan Ricks and Gary Gorton. For Ricks (see "Regulating Money Creation after the Crisis") the significant characteristics of money are:
- It is safe or price-protected; that is, it is always convertible at par; and
- It is liquid; that is, it is readily convertible into cash or accepted by third parties.
Essential to the maintenance of these characteristics is that there must be no secrets about the instruments known to third parties which could adversely affect their value, as even the suspicion of such would undermine either or both of the value or the liquidity of the instruments (See Gorton, "Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007").
By definition, cash is the prime example of money. The reason for this is that it is backed by the full faith and credit of the sovereign. In an earlier era, when bank notes were issued by individual banks, this was not the case and there were times when such notes were heavily discounted due to uncertainties about the solvency of the issuing institutions. Treasury bills are money- equivalents for the same reason.
Another money-equivalent is insured bank deposits, a fact which is taken for granted these days. But again, this was not always the case and in Part A, the story of how bank deposits were converted into true money-equivalents will be briefly sketched, relying heavily upon the papers cited above as well as that of Acharya, Cooley, Richardson and Walter, "Manufacturing Tail Risk: Perspectives on the Financial Crisis of 2007-09". Part B will then turn to the story of the attempt to make certain private instruments into money-equivalents and Part C will detail the fate which befell that attempt. Part D will deal with the subsequent regulatory remedial efforts and some conclusions will be drawn in Part E.
It will be noted that the great majority of what follows deals with events which took place or conditions which existed in the United States. For better or worse this is as it must be as the fate of the rest of the financial world is inextricably intertwined with and dependent upon these events and conditions.
A) THE QUIET PERIOD
Fractional reserve banking (a term representative of the fact that banks' actual cash reserves typically amount to only a small fraction of their outstanding deposits) is inherently risky. Anyone who has seen "It's A Wonderful Life" will probably remember the scene where all of Jimmy Stewart's customers showed up at the Bailey Building and Loan Association wanting to withdraw their money. As he explained, their deposits had been lent out and it was not possible to meet their demands. This was a classic bank run (although not systemic as it was the only bank to be run) although the outcome, his customers being mollified by his explanation, was not the typical result. The essential feature of such runs is that depositors want to cash out; that is, to convert what they had believed to be money-equivalents, their bank deposits, but in which, due to uncertainties about the solvency of the bank or the banking system as a whole, they no longer have confidence, to a more reliable form of money, cash. When such doubts extend to the banking system as a whole, the run becomes systemic. Such runs were relatively common occurrences throughout the latter part of the 19th and well into the 20th century and were not brought under control until the 1930s after banking regulation had evolved through three broad phases.
First, in order to address the problem of risk-taking by banks, a host of risk constraints were gradually introduced during the latter part of the 19th century, including cash reserve requirements, restrictions on eligible assets, investments and activities and a supervisory regime to maintain compliance with these requirements and restrictions.
Nevertheless, despite these controls, banking panics continued unabated and became associated with major disruptions to the broader economy. The Panic of 1907 brought the banking system to the brink of collapse and was only averted by the efforts of JPMorgan which, it was concluded in retrospect, was not a satisfactory bulwark against future crises. This led directly to the creation of the Federal Reserve whose main purpose was to supply liquidity to the banking system in times of stress; in other words, to provide discretionary central bank support as the lender of last resort. The theory, based largely on the views of Walter Bagehot expressed in "Lombard Street: A Description of the Money Market", was that the central bank should maintain a large reserve and lend it out to institutions very freely against any good securities in times of panic in order to allay alarms.
Over the ensuing two decades, however, despite being authorized to supply this liquidity, the Fed seemed reluctant to do so. Instead, it followed what has been described as a "passive, defensive, hesitant policy"(Friedman and Schwartz, "A Monetary History of the United States, 1867-1960") which eventually resulted in its failure to support banks following the crash of 1929, culminating in the failure of many financial institutions and, arguably, the Great Depression.
Bank panics were finally brought under control by the introduction of deposit insurance in 1934. Unlike lender-of-last-resort support, which is discretionary, deposit insurance is guaranteed up-front and thus brings into play the full faith and credit of the sovereign. As a result, deposit insurance fully addresses depositors' concerns over the safety of their deposits thus transforming them into a form of "safe" debt or reliable money-equivalents eliminating at its source the motivation for bank runs. On the other hand, the creation of this insurance creates incentives for banks to extract value from the insurance by taking greater risks, an effect known as moral hazard or, as described by David Skeel in "The New Financial Deal", "risk taking by those who are protected against risk". In order to counteract this phenomenon, risk constraints become even more important and were re-oriented to address the adverse incentives that accompanied the provision of insurance and "became the underlying terms and conditions of the insurance policy"(Ricks, "Regulating Money Creation after the Crisis").
Among the most important risk constraints were the so-called Glass-Steagall restrictions, pursuant to which the risk-taking activities of banks were constrained by the separation of commercial and investment banking business, and the introduction of enhanced supervision of individual banks, the most significant element of which was the introduction of capital requirements which directly addressed the moral hazard created by the advent of deposit insurance.
In order to fully protect depositors it also became necessary to ensure that financial institutions were not able to take deposits except under the terms of the banking covenant referenced above. As a consequence of these provisions, significant franchise value accrued to deposit-taking institutions. The effectiveness of deposit insurance in stemming panics depended critically on the fact that insured deposits constituted a large majority of all money-claims in the financial system. This remained the case throughout the period from the 1930s to the 1980s, the so-called "Quiet Period" noted for its absence of bank panics.
Beginning in the 1970s, however, various developments had the cumulative effect of eroding the financial stability which characterized the Quiet Period. Competition from non-banks, fueled in part by interest rate ceilings on deposits, which had allowed money market funds to gain significant market share, and the growth of commercial paper, had begun to erode the franchise value of banks. In the face of competition from new products, banks needed to innovate in order to survive. The most important bank innovation was securitization. At the same time technological developments and the elimination of rules restricting the geographic scope of banks' operations served to erode the ties between local banks and their customers. Securitization further reinforced the move away from traditional relationship banking by encouraging banks to view their loans as tradable assets. Further, and perhaps decisively, reinforcement of this tendency was ironically provided by the introduction of regulatory capital rules in Basel I and Basel II and accompanying changes to accounting rules which provided an incentive for banks to move assets off balance sheet, using securitization in order to avoid regulatory capital charges.
The cumulative effect of the foregoing was only compounded by changes to banking laws during the 1980s and 1990s which were essentially deregulatory. Perhaps most significantly, the repeal of the Glass-Steagall Act in 1999, which had enshrined the separation of commercial and investment banking activities, allowed banks to exit their traditional business lines in the regulated sector in favour of trading and fee-based activities in the unregulated sector. Another noteworthy development involved amendments to banking legislation which left derivatives free from regulation and expanded the exemption from the automatic stay provisions in bankruptcy to include not only repurchase contracts collateralized by government and government agency obligations but also a broader class of collateral, including mortgage-backed securities.
"These laws, along with the administrative actions that both preceded and implemented them, removed many restrictions on activities, affiliations, and the geographic reach of commercial banks without substituting new regulatory mechanisms to control the institution-specific risks that could arise from the growth of financial services conglomerates, much less the systemic risks created by the rapid integration of capital markets and traditional lending activities" (Daniel Tarullo, "Financial Stability Regulation").
Thus the safety infrastructure which guaranteed the security of the financial system during the Quiet Period was effectively undermined and the door was opened to the rise of an alternative system of banking which has come to be known as the "shadow banking system".
B) THE RISE OF THE SHADOW BANKING SYSTEM
The essence of shadow banking, and what makes it banking at all, is the attempt by private actors to create money-equivalents but, crucially, without the backing of the sovereign. In substitution for the full faith and credit of the sovereign, the essential element in making bank debt safe, were substituted collateralized private party guarantees. The story of the financial crisis is, in part, the story of the failure of these guarantees and, in other part, the re-intermediation of these guarantees into the banking system and through it onto the balance sheet of the sovereign.
The definition of shadow banking most commonly cited is that used by the Financial Stability Board (FSB): "Credit intermediation involving entities and activities outside the regular banking system". As opposed to bank finance, which occurs on the balance sheet of a single financial institution, shadow banking involves "a sequence or chain of discrete operations typically performed by separate specialist non-bank entities which interact across the wholesale financial market" (Richard Comotto, "Shadow Banking and Repo").
Pozsar describes this sequence in "Can Shadow Banking be addressed without the Balance Sheet of the Sovereign?" as risk-stripping, whereby pools of long-term, risky loans are stripped of their component (credit, maturity and liquidity) risks and turned into safe, short-term liquid instruments or money. The process starts with securitization, a form of credit-transformation whereby pools of assets are transferred to special purpose vehicles and the resulting cash flow is transformed into equity, mezzanine and AAA tranches. These latter tranches form the collateral which is meant to render the debt which financed it safe, the first essential feature of a money-equivalent. The tranches may be purchased by conduits which fund themselves by the issuance of short-term commercial paper or by securities dealers that fund the positions through collateralized borrowing using repurchase (repo) agreements.
Repos are like demand deposits. One party deposits (lends) money with a counterparty, usually overnight, and receives interest. To make the deposit safe, the depositor is provided with acceptably safe collateral such as treasury bills or, after the above-mentioned revisions to the bankruptcy law safe harbor, certain mortgage-backed or asset-backed securities. If the counterparty defaults, then the collateral can be sold without risk of being stayed as a result of a proceeding in bankruptcy. Assuming no default, the next morning the collateral is either returned for cash plus interest or the transaction is rolled over for another night. The investor can always, in effect, withdraw the money by not rolling over the repo (See Gary Gorton, "Misunderstanding Financial Crises: Why We Don't See Them Coming").
Quite often money market funds (MMFs) were involved as the end purchaser of the commercial paper issued by the conduits or as lenders in a repo transaction. Shares in MMFs are issued at par with the fund sponsor (typically a bank) providing an implicit guarantee that the par value of the shares will be maintained. If the assets held by the fund decrease in value (called "breaking the buck") then this implicit guarantee is expected to be honored. If there are any doubts that it will be honored, the dynamic of a bank panic comes into play. MMFs shares, like repos, also share the characteristics of demand deposits.
By borrowing short and lending long, that is by financing longer-term securitized debt with short-term debt, shadow bank participants were involved in the classic bank business of maturity transformation. In this sense, this was "an alternative form of traditional banking, the crucial difference being that these alternative banks were not funded by depositors, but by investors in the wholesale funding market and that maturity transformation did not occur on bank balance sheets but through capital markets in off-balance-sheet vehicles outside the purview of regulators" (Pozsar, "The Rise and Fall of the Shadow Banking System").
Liquidity transformation, that is the funding of illiquid assets with liquid liabilities, "achieves the same end as maturity transformation but uses different techniques". For example, a liquid security may be created from a pool of illiquid collateral assets "through the use of a credit rating to reduce the information asymmetry between borrowers or lenders" (Comotto, "Shadow Banking and Repo"). The senior tranches of securitizations were rated AAA, an essential feature of the system. As a result investors were led to believe in the soundness of the underlying collateral. We will see that it was the perceived safety of this collateral which was the ground upon which the shadow banking system was built and upon which it foundered.
While shadow banks conduct credit and maturity transformation similar to traditional banks, shadow banks do so without direct and explicit public lender-of-last-resort support and deposit insurance. Rather, various private alternative forms of guarantee were constructed. For example, banks provided liquidity guarantees or puts to conduits to address the rollover risk associated with conduits' commercial paper. Thus the "risks that traditional banks offloaded to the sovereign, the shadow banking system offloaded to private actors including traditional banks via liquidity puts and derivatives" (Pozsar, "Can Shadow Banking be Addressed Without the Balance Sheet of the Sovereign?"). The comparative deficiencies of these private alternatives revealed by events illustrated the inherently fragile nature of shadow banks, "not unlike the commercial banking system before the creation of the public safety net" (Adrian & Aschraft, "Shadow Banking Regulation").
It is important to emphasize that these private guarantees were mostly provided by banks (in the form of liquidity guarantees to conduits) and were structured in a way that greatly reduced the amount of regulatory capital which was required to be held against them. The risk premium attached to these guarantees was small reflecting the view that there was not a very significant risk of their being called upon. In the end, this turned out to have been an unjustified assumption, one which resulted in the mis-pricing of the guarantees and their consequential (massive) over-issuance. Moreover, the guarantees gave the shadow banking entities access to the sovereign through the government safety net available to the guarantors, another fact which wasn't widely appreciated until the crisis.
Numerous academic and official studies have attempted to estimate the size of the shadow banking sector. Pozsor, Adrian, Ashcroft and Boesky suggested a total of $20 trillion for the US in 2008. The FSB estimates that the global shadow banking system rose from $26 trillion in 2002 to $62 trillion in 2007. (Deloitte's in their Shadow Banking Index indicates a smaller estimate due, most importantly, to the inclusion by the FSB of non-MMMF investment funds, finance companies and "others"). In aggregate, the shadow banking system's share of total financial intermediation peaked at about 27% in 2007, about half the size of banking system assets. The bottom line is that the shadow banking system created explosive growth in leverage and liquidity risk outside the regulatory purview of central banks.
Various explanations for the growth of shadow banking have been explored in the academic literature. Certain commentators single out technology, which enabled non-bank financial participants to compete with traditional banks in providing new innovations at lower cost, as the main catalyst:
"At the risk of gross over-simplification, the presence of such a high level of institutional demand for (especially) short-term debt instruments plus the technological evolution in ways of structuring these products meant that the work traditionally done by the banking system gradually moved to Wall Street – here it became known as the "shadow banking system" (Donald Langevoort, "Global Securities Regulation after the Financial Crisis").
One of the first explanations which caught the attention of regulators and the public following the events of 2008 focused upon the model of securitization which had developed during the decade leading up to the crisis. Securitization forms the cornerstone of the shadow banking edifice. It was originally seen as a financing technique justified by "market completion", whereby, on the one hand, banks and financing companies were able to spread the risk attendant on their loan portfolios and to free up capacity for making further loans, and, on the other, investments in loan portfolios could be tailored to model the risk appetites of various investors by the development of tranching techniques. However, eventually and perhaps inevitably, the movement away from traditional relationship banking to a market-based approach to loan origination which defined securitization led to the development of a model which has commonly been labeled as the "originate-to-distribute" model of loan origination. The most relevant feature of this model for our purposes is the embedded moral hazard resulting from the fact that originators retained no interest in the mortgages they originated which were created for the sole purpose of selling them on as soon as possible.
A particularly pithy description of this model in action is provided at McCulley in "The Shadow Banking System and Hyman Minsky's Economic Journey".
"So, we had an originate-to-distribute model and no stake in the game for the originator, and the guy in the middle was being asked to create product for the shadow banking system. The system was demanding product. Well if you have got to feed the beast that wants product, how do you do it? You have a systemic degradation in underwriting standards so that you can originate more. But as you originate more, you bid up the price of property and, therefore, you say, "These junk borrowers really are not junk borrowers. They are not defaulting." So you drop your standards once again and you take prices up. And still you do not get a high default rate. The reason this system worked is that you, as the guy in the middle, had somebody bless it: the credit rating agencies. A key part of keeping the three bubbles (property valuation, mortgage finance, and the shadow banking system) going was what the rating agencies thought the default rates would be low because they had been low. But they had been low because the degradation of underwriting standards was driving up asset prices."
However, while the originate-to-distribute model may explain the poor quality of mortgage portfolios, it fails to explain why banks, GSEs and broker dealers held onto about 50% of all mortgage-related debt at the time of the crisis (Acharya et al, "Manufacturing Tail Risk; A Perspective on the Financial Crisis of 2007-09"). What does explain it, however, at least according to what can be characterized as the supply-side explanation, was the fact that what banks were really engaged in was massive and systematic regulatory arbitrage.
The erosion of the safety infrastructure of the Quiet Period described above left capital requirements as the only meaningful obstacle to increased risk taking. If banks held the loans on their balance sheets they faced a regulatory capital charge. However, this could be much reduced or even eliminated under Basel I and II if they were to transfer the loans to off-balance sheet entities. According to Acharya et al, the goal was to create a return on equity through the carry of asset-backed securities and simultaneously avoid minimum capital requirements. Thus, according to this view, contrary to the common understanding of securitization as a method of risk transfer, banks were actually conducting the securitization of assets without risk transfer, "that is, a way for banks to concentrate aggregate risks rather than disperse them, and to do so without holding capital against their risks. The net result was to keep the risk concentrated in the financial institutions themselves and, indeed, to keep that risk at a greatly magnified level because of the overleveraging that it allowed..."(Acharya, Schnabl and Suarez, "Securitization Without Risk Transfer"); or, to make "an under-capitalized $2.3 trillion, one-way asymmetric bet on the economy, particularly tied to residential real estate but also involving commercial real estate and consumer credit" (Acharya, et al, "Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-09").
The result is described by Adrian and Shin in "The Shadow Banking System: Implications for Financial Regulation":
"When the downturn arrived, bad loans were either sitting on the balance sheets of the large financial intermediaries or they were in SPVs sponsored by them ... The severity of the current crisis lies precisely in the fact that the bad loans were not passed on to final investors ... the subprime crisis has its origin in the increased supply of loans – or equivalently, in the imperative to find new assets to fill expanding balance sheets. This explains two features of the subprime crisis:
- first, why apparently sophisticated financial intermediaries continued to lend to borrowers of dubious creditworthiness, and
- second, why such sophisticated financial intermediaries held the bad loans on their own balance sheets, rather than passing them on to unsuspecting investors.
Both facts are explained by the imperative to use up slack in balance sheet capacity during an upturn in the credit cycle."
Exactly why this happened has been much discussed. A rather mechanistic explanation is provided by Shin in "Securitization and Financial Stability":
"The mechanism proposed here for the origin of the subprime crisis has more in common with the supply side explanation. The greater risk-taking capacity of the shadow banking system leads to an increased demand for new assets to fill the expanding balance sheets and an increase in leverage. The picture is of an inflating balloon which fills up with new assets. As the balloon expands, the banks search for new assets to fill the balloon. They look for borrowers that they can lend to. However, once they have exhausted all the good borrowers, they need to scour for other borrowers - even subprime ones. The seeds of the subsequent downturn on the credit cycle are thus sown."
The reason for the banks' indifference to the risks associated with this mechanism, that is, the risk of the balloon bursting, is often cited as being that they counted on a government bailout since they were too big to be allowed to fail. This is a classic example of moral hazard. In addition, elements of individual cupidity are often alleged, as reflected in a blog piece by Satyajit Das on the Economist magazine's issue on financial innovation:
"Financial innovation played a crucial role in allowing the increase in debt levels and leverage. It created complex linkages between financial participants increasing systemic risk and informational failures. There is no acknowledgement [in the magazine articles] that much of what is called financial innovation is economic rent extraction, exploiting lack of transparency as well as information and knowledge asymmetries. There is no discussion of the destructive bonus culture which encourages certain behaviors in financial institutions. Much of what passes for financial innovation is specifically designed to conceal risk, obfuscate investors and reduce transparency. The process is entirely deliberate. Efficiency and transparency is not consistent with the high profit margining on Wall Street and the city. Financial products need to be opaque and priced inefficiently to produce excessive profits."
This is an example of the so-called agency problem which has been described by Steven Schwarcz in "Regulating Shadow Banking":
"Commentators widely acknowledge this type of principle-agent failure as it involves conflicts of interest between managers and owners of firms. At least in the shadow-banking network, however, the more serious conflict occurs within the firm: secondary managers, such as investor analysts and investment-bank vice president, are almost always paid under short-term compensation schemes, misaligning their interests with the long-term interests of the firm. Although this intra-firm prinicipal-agent failure is not unique to shadow banking, the complexity of shadow banking, combined with the very technology that enables shadow banking to thrive, can exacerbate the failure."
Without disputing the existence of an agency problem, others have found a sufficient explanation for the financial crisis in another form of human frailty. Most notably, Andrei Shleiffer and Nicola Gennaioli attribute the increase in the total amount of risk-taking to neglected or misunderstood risks on the part of all parties which resulted in their not recognizing certain risk correlations:
"It seems to me that the fundamental cause of the financial crisis is that market participants, as well as the regulators, did not understand the risks inherent in ABSs and other new types of securities. They did not expect that home prices could fall so much and so fast and in so many places at once. They did not understand correlations in home prices and defaults. They used incorrect models. It is not just the ratings agencies that messed things up, but the whole market misunderstood the risks, as is clear from the fact that the price of risk was extremely low in the summer of 2007 and did not rise much in the months after that" (Andrei Shleiffer, Comment to Gorton and Metrick, "Regulating the Shadow Banking System").
"When some risks are neglected, more securities may be issued than are sustainable or indeed possible under rational expectations and leverage is dangerously increased. The reason is that the neglected risks may not be laid off on intermediaries or other parties when manufacturing new securities. Investors thus end up bearing risk without recognizing that they are doing so" (Gennaioli, Shleiffer and Vishny, "Financial Innovation and Financial Fragility"). Thus, although there are significant benefits in a private supply of safe securities, such securities may owe their very existence to neglected risks. "The trouble is not the realization of neglected risks per se but the increase in the total amount of risk taking that is facilitated." (Gennaioli, Shleifer and Vishny, "A Model for Shadow Banking").
This effect has been further elaborated upon by Adair Turner in "Shadow Banking and Financial Instability":
"Financial systems which perform credit intermediation and maturity transformation, whether within banks or via shadow banks and market-based credit contracts, are thus capable of generating a set of claims whose combination of apparent risk, return and liquidity is in aggregate unsustainable and indeed impossible ... The financial system can use the techniques of pooling, tranching and maturity transformation, to produce different combinations of risk return and liquidity, which appeal to different investor/depositor bases, but it cannot make these risks go away. But the system can for a period of time appear to promise combinations of lower risk, higher return and greater liquidity that cannot objectively in the long term be sustained. Banks can do this and banking systems are therefore only made stable by some combination of regulation, central bank liquidity insurance and deposit insurance. And multiple step shadow banking systems can do this too, and did so on a massive scale before the crisis".
The supply side explanation is only one side of the coin however. The 1990s also saw a tremendous growth in institutional and corporate cash pools which created a demand for "safe" debt: instruments which were low risk but gave a return uplift above zero risk instruments such as Treasuries and were also liquid-essentially "money-equivalents". In addition, it should not be forgotten that this took place in an environment of historically loose monetary policy on the part of central banks. The main point of this policy seemed to be a matter of making liquidity in the economy as free as possible which led to the growth of a credit-fueled asset bubble. Failure of the central banks to raise interest rates in the face of the bubble caused it to grow even larger since this translated into cheaper credit offered to borrowers which resulted in increased market activity and, in turn, increased asset prices. This dynamic only served to increase the demand for safe assets.
However, the amount of money looking for investment far exceeded the amount that could be insured in demand deposit accounts. Furthermore there was not enough sovereign debt available to satisfy the demand. As a result, there was a gap, a demand for the manufacturing of money-equivalent assets, which was filled by privately guaranteed instruments created by shadow banks. Thus, "the story of securitisation reflected demand as well as supply factors. It was not just that banks chose to develop an '[o]riginate-and-distribute' model of credit extension in order to reduce capital requirements: but that money market funds, repo and other secured lending contracts developed as means to meet an increasing demand for new forms of safe liquid assets, new variants of 'private money' " (Adrian Turner, "Shadow Banking and Financial Instability"). This bears some emphasizing. Recognition of the existence and persistence of this demand and its role in the development of the shadow banking system is of crucial importance, as we shall see, in determining appropriate and effective policy responses to shadow banking.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.