The Center of the Universe

St Croix, United States Virgin Islands

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

NY FED – Shadow Financial Market

Posted by WARREN MOSLER on July 31st, 2009


[Skip to the end]

The findings add support to my proposal to ban banks from all secondary markets

Federal Reserve Bank of New York
Staff Reports
The Shadow Banking System:
Implications for Financial Regulation
Tobias Adrian
Hyun Song Shin
Staff Report no. 382
July 2009

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 the 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 errors or omissions are the responsibility of the authors.

The Shadow Banking System: Implications for Financial Regulation
Tobias Adrian and Hyun Song Shin
Federal Reserve Bank of New York Staff Reports, no. 382
July 2009
JEL classification: G28, G18, K20

Abstract
The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.


[top]

11 Responses to “NY FED – Shadow Financial Market”

  1. Winslow R. Says:

    I’d go a step further and reduce intermediation throughout the system and instead require all borrowers go to the Fed with banks acting as nonprofit conduits.

    It looks like the trend in bank lending has started on a rapid downward path once again. Stock market gains seem to be the only policy tool still functioning as deficits become less popular each day.

    2008

    1 Bank credit

    Mar 2009 9,296.1
    Apr 2009 9,270.0
    May 2009 9,357.4
    Jun 2009 9,349.5
    Weekending Jul 22 9,234.7

    http://www.federalreserve.gov/releases/h8/current/default.htm

    Reply

  2. Warren Mosler Says:

    for what it’s worth, allowing banks to be for profit public private partnerships means the private sector will price.

    If the banks are publicly owned the public sector will price risk.

    so it depends on who you want to price risk.

    If the banks are kept on the straight and narrow I’m not too concerned at this point about non bank lending, as those lenders will need to get non bank funding etc.

    Reply

  3. Winslow R. Says:

    for what it’s worth, allowing banks to be for profit public private partnerships means the private sector will price.

    *though as it happens we have for profit public private partnerships profiting from underpricing risk while claiming to innovate.

    If the banks are publicly owned the public sector will price risk.

    *yes the pubic is capable of pricing risk on boring, unimaginative products that actually help society innovate like student loans, home loans, and SBA loans.

    so it depends on who you want to price risk.

    *and it depends on who we want innovating, the banks or students? Banks should accept their position as utilities. Bank profits are taxes on the real innovation we need.

    If the banks are kept on the straight and narrow I’m not too concerned at this point about non bank lending, as those lenders will need to get non bank funding etc.

    *regulate bank innovation but not bank profit? Non bank lending messes up the FED transmission mechanism as changes in interest rates just shift income between savers and borrowers without adjusting aggregate demand. The Fed, as the preferred intermediator in both bank and nonbank lending, would allow interest rates to actually alter aggregate demand by removing/adding money from/to the economy.

    Reply

  4. Warren Mosler Says:

    i don’t see how non bank lending alters the causation of interest rates?

    also, we already use the public lending channels when we want risk priced lower than the private sector alone would otherwise price risk. such as lower rates for lower income home buyers, student loans, etc.

    Reply

  5. Winslow R. Says:

    i don’t see how non bank lending alters the causation of interest rates?

    *If a nonbank makes a loan it earns the ‘spread’ and as a nonbank is part of the private sector there is no change in private income. If the Fed funds a loan it earns the spread and as the Fed is part of the public sector, private income is reduced. Raising interest rates would then shift private income from the private to public sectors. Kind of like raising taxes.

    also, we already use the public lending channels when we want risk priced lower than the private sector alone would otherwise price risk. such as lower rates for lower income home buyers, student loans, etc.

    *Right, but these are profit generating loans which encourages bank ‘innovation’ to capture additional profits which reduces private sector innovation.

    Reply

  6. Warren Mosler Says:

    got it, thanks- agreed to the extent the govt would allow interest rates to alter the deficit.

    Reply

  7. knapp Says:

    Warren,

    Steve Leisman just gave you a shout out: “As my good friend Warren Mosler always reminds me banks are not reserve constrainted.”

    Reply

    jcmccutcheon Reply:

    Interesting. Although, IHHO, he’s a good reporter he always sounded out of paradigm to me. Gonna have to pay closer attention.

    Reply

    Matt Franko Reply:

    Knapp,

    Leisman quote is at about 3:30 in this segment.

    Resp,

    Reply

    jcmccutcheon Reply:

    Awesome. Thanks.

    Reply

  8. Warren Mosler Says:

    thanks! putting it on the main page

    Reply

Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>