Moreira, A. & Savov, A. (2014) “Shadow banking and the economy“, VoxEU Organisation, 16 Σεπτεμβρίου.
The prevailing view of shadow banking is that it is all about regulatory arbitrage – evading capital requirements and exploiting ‘too big to fail’. This column focuses instead on the tradeoff between economic growth and financial stability. Shadow banking transforms risky, illiquid assets into securities that are – in good times, at least – treated like money. This alleviates the shortage of safe assets, thereby stimulating growth. However, this process builds up fragility, and can exacerbate the depth of the bust when the liquidity of shadow banking securities evaporates.
Shadow banking, what is it good for? At the epicentre of the global financial crisis, shadow banking has become the focus of intense regulatory scrutiny. All reform proposals implicitly take a stance on its economic value.
According to the prevailing regulatory arbitrage and neglected risks views, it doesn’t have any – shadow banking is about evading capital requirements, exploiting ‘too big to fail’, and marketing risky securities as safe to unwitting investors. The right response is to bring shadow banking into the regulatory and supervisory regime that covers insured banks.
A third view, the liquidity transformation view, is different. It says that shadow banking adds value by creating money-like liquid securities from risky illiquid assets (Gorton and Metrick 2010). While this process is inherently unstable, simply shutting it down risks damaging liquidity provision to the real economy.
The liquidity transformation view confronts us with a real tradeoff between financial stability and economic growth. In a recent paper (Moreira and Savov 2014) we formalise this tradeoff within a dynamic macroeconomic model. In this column we explain our framework and draw its implications for regulatory reform.
Σχετικές αναρτήσεις:
- Perotti, Enr. (2014) “The roots of shadow banking“, VoxEU Organisation, 16 Ιανουαρίου.
- Pozsar, Z. (2013) “Shadow banking and the global financial ecosystem“, VoxEU Organisation, 07 Νοεμβρίου.
- Schneider, Fr., Williams, C. (2013) “The Shadow Economy“, The Institute of Economic Affairs.