Shadow Banking and Systemic Risk in Europe and China

We compare the European and Chinese shadow banking systems. While the European shadow banking system is better developed than the Chinese shadow banking system, herd behavior and other factors in European markets create systemic risk, which contributed in part to the financial crisis. Dispersion of risk across the "under-developed" shadow banking system in China has led to some cases of localized, concentrated risk, but not to systemic risk. We discuss proposed European shadow banking regulation and its implications for systemic risk, and discuss what lessons China might glean from such policies. We also discuss what lessons China's diverse and systemically uncoordinated shadow banking sector might provide for Europe

Sizing the European Shadow Banking System: A New Methodology

One of the critical unanswered questions relating to the shadow-banking system has been to quantify its scale in an industry where entities, by design, are opaque and often outside of regulated and publically shared frameworks. However almost all shadow banking entities, including hedge funds, private equity funds and special purpose vehicles ("SPVs"), interact with the financial markets via regulated investment banks. For example, many SPVs are in fact originated as part of investment banking business and hedge funds typically transact in financial markets exclusively via the "prime brokerage" division of investment banks. This interface with the regulated banking environment combines with the typical practise by investment banks of equalizing compensation (Including bonus) ratios to revenues globally which then allows identification of the implied difference in revenues and hence assets that represents the shadow banking system. The paper will present for critique the results of this methodology to estimate the UK shadow banking system including European business managed from the UK. The estimate will imply a larger scale of shadow banking than previous estimates at £548 billion which, when combined with hedge fund assets of £360 billion (FSA, 2011) gives total shadow banking assets of over £900 billion. It is proposed that the large gap between the estimates of this paper and other estimates reflects the huge, and previously unknown, scale of offshore activities of UK investment banks

Is shadow banking really banking?

To those who don't know, the term "shadow banking" probably has a negative connotation. This primer draws parallels between what has been termed the shadow banking sector and the traditional banking sector—showing that they are similar in many ways.Banks and banking ; Financial risk management ; Financial crises

Srovnání stínového bankovnictví v Evropské unii a v Číně

Nowadays, more and more investors choose to be involved into shadow banking business, which have helped the development of shadow banking system. Since the financial crisis in 2008, majority of investors were afraid to traditional banking system, they realized that they should minimum their risk of investments, one way of the reducing risk is that making their variety of investments more various, they do not trust any single financial institutions any more, as a result, it is risk distribution. Finally, the shadow banking became a new popular way to invest or finance in both China and European Union. However, due to the lack of supervision of shadow banking system, the shadow banking system cruel grew, which would interference the original stable financial system if we would ignore the potential risks of shadow banking system and we would not make a better regulation system to control it. The goal of this thesis is the description and the analysis of potential risk and regulation of shadow banking system in China and European Union. In chapter 2, we will introduce the theoretical background of shadow banking system in generally. In contrast, there will be some comparison banking system between shadow banking system and traditional banking system. Also, there will be summarized introduction of shadow banking system in specifically, which includes operations, risks of shadow banking system and so on. In chapter 3, we will introduce some existing shadow banking system in both China and European Union, which will be more specific to help readers to know working of shadow banking system in China and European Union better. It mainly focuses on the developments, composition, characteristics, impacts and risks of shadow banking system in both selected countries. In chapter 4, there will be the analysis of potential risk and regulation of shadow banking system in China and European Union, which would help readers to get in touch the existing situation of shadow banking business in selected areas nowadays.Nowadays, more and more investors choose to be involved into shadow banking business, which have helped the development of shadow banking system. Since the financial crisis in 2008, majority of investors were afraid to traditional banking system, they realized that they should minimum their risk of investments, one way of the reducing risk is that making their variety of investments more various, they do not trust any single financial institutions any more, as a result, it is risk distribution. Finally, the shadow banking became a new popular way to invest or finance in both China and European Union. However, due to the lack of supervision of shadow banking system, the shadow banking system cruel grew, which would interference the original stable financial system if we would ignore the potential risks of shadow banking system and we would not make a better regulation system to control it. The goal of this thesis is the description and the analysis of potential risk and regulation of shadow banking system in China and European Union. In chapter 2, we will introduce the theoretical background of shadow banking system in generally. In contrast, there will be some comparison banking system between shadow banking system and traditional banking system. Also, there will be summarized introduction of shadow banking system in specifically, which includes operations, risks of shadow banking system and so on. In chapter 3, we will introduce some existing shadow banking system in both China and European Union, which will be more specific to help readers to know working of shadow banking system in China and European Union better. It mainly focuses on the developments, composition, characteristics, impacts and risks of shadow banking system in both selected countries. In chapter 4, there will be the analysis of potential risk and regulation of shadow banking system in China and European Union, which would help readers to get in touch the existing situation of shadow banking business in selected areas nowadays.154 - Katedra financídobř

The Interconnections Between the Shadow Banking System and the Regular Banking System. Evidence from the Euro Area

One of the most important lessons of the global financial crisis has been the deep interconnectedness between the shadow banking system and the regular banking system. These two systems are linked through several channels, of which one of the most important is the financing provided by regular banks to the shadow banking system and vice versa. In addition, regular banks can originate loans that are securitized. Subsequently, part of the securitized instruments may remain on the balance sheet of the originating banks or be found on the balance sheet of other regular banks and shadow banking entities. These links between the two systems can increase contagion and systemic risks, which in turn may affect financial stability. The financial crisis has acutely revealed the negative effects these interconnections can generate. The interconnections are underestimated by the available data because of the difficulties in gathering information on the euro area. Within this context, our paper tries to evaluate and analyze the interconnections between the shadow banking system and the regular banking system within the euro area, both in the pre-crisis period and currently. Finally, some measures to regulate the interconnections between these two systems are raised

The Impact of Banking Development on the Size of the Shadow Economy

This paper employs data on 119 countries for the period 1999/2000 to 2004/2005 to examine the impact of banking development on the size of shadow economies. The main results indicate that an improvement in the development of the banking sector is associated with a smaller shadow economy in a wide cross-section of countries. In addition, both depth and efficiency of the banking sector matter equally in reducing the size of a shadow economy. These stylized results are robust under a variety of specifications and controls for simultaneity bias.Shadow Economy, Banking Development.

PENETRASI PRAKTIK ‘SHADOW BANKING’ DI INDONESIA

These day the world of economy matters in Indonesia begins to recognize the technical term of shadow banking. Shadow banking is non-bank financial institution gives credit which conducts many operational activities proper with banks. Because this activity has unregulated and unsupervised firmly, it becomes significant to watch closely which potential causing many crisis at following term in Indonesia. The activities of shadow banking grow and substantiate penetration applied the gap of banking regulation which is stricter than shadow bank institutions. This paper proposes to analyze the influence of banking regulation on a practice of shadow banking and an impact of Indonesia economy. In using an explanatory research, the point of this research is that the regulation of industrial banking becomes strict, it shows that growing the gap of shadow banking institution for penetration makes use of banking regulation. The growth of unregulated shadow banking gives negative effect for economy stability of country.Keywords: shadow banking, bank regulation, ban

The Interrupted Power Law and The Size of Shadow Banking

Using public data (Forbes Global 2000) we show that the asset sizes for the largest global firms follow a Pareto distribution in an intermediate range, that is ``interrupted'' by a sharp cut-off in its upper tail, where it is totally dominated by financial firms. This flattening of the distribution contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time. Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale. This makes our findings of an ``interrupted'' Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample should operate in such a regime. We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an (upper) estimate of the size of the shadow banking system. This estimate -- which we propose as a shadow banking index -- compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010. Finally, we propose a proportional random growth model that reproduces the observed distribution, thereby providing a quantitative estimate of the intensity of shadow banking activity.Comment: 12 pages, 5 figures, 2 tables. To appear in Plos ONE 201

Shadow Banking and Regulation in China and Other Developing Countries

The rapid but largely unregulated growth in shadow banking in developing countries such as China can jeopardize financial stability. This article discusses that growth and argues that a regulatory balance is needed to help protect financial stability while preserving shadow banking as an important channel of alternative funding. The article also analyzes how that regulation could be designed

Making Sense of the Rise of China's Shadow-Banking

This paper aims to make sense of the rise of shadow banking in the context of the Chinese economic transformation to see if the regulator could avoid the hard-crash. Reportedly the estimated size of China's shadow banking system has reached to the level of equivalent to 36 percent of GDP as of the end of March 2013. But the emergence of systemic risk in accordance with the expansion of shadow banking in China does not seem to be a strong possibility, partly because even if the turmoil in the shadow banking occurs, commercial banks typically are not responsible for compensating customer losses so far as an effective firewall between commercial banking and shadow banking is constructed. Meanwhile, the information on who provides risk funds to the shadow banking system and on how the funds are used by ultimate users is still under the shadow of the system. This paper aims to make sense of the limited disclosure of information on shadow banking for the regulator to ease the so-called "audience effects", making time for the transformation to a new phase of post-industrialization. Keywords: Audience effect, China, Shadow bankin