The shadow banking system: implications for fi nancial regulation

The current financial crisis has highlighted the changing role of financial institutions and the growing importance of the “shadow banking system” that grew on the back of the securitisation of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but has had a profound influence for the global financial system as a whole. In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are closely tied to the fluctuations of leverage of market-based fi nancial intermediaries. Balance sheet growth of market-based financial intermediaries provides a window on liquidity in the sense of availability of credit, while contractions of balance sheets have tended to precede the onset of financial crises. Securitisation was intended as a way to disperse credit risk to those who were better able to absorb losses, but instead securitisation served to increase the fragility of the financial system as a whole by allowing banks and other intermediaries to leverage up by buying each others’ securities. In the new, post-crisis financial system, the role of securitisation is likely to be held in check by more stringent financial regulation and the recognition of the importance of preventing excessive leverage and maturity mismatch in undermining financial stability.

Liquidity and financial contagion.

There is an apparent puzzle at the heart of the 2007 credit crisis. The subprime mortgage sector is small relative to the financial system as a whole and the exposure was widely dispersed through securitization. Yet the crisis in the credit market has been potent. Traditionally, financial contagion has been viewed through the lens of defaults, where if A has borrowed from B and B has borrowed from C, then the default of A impacts B, which then impacts C, etc. However, in a modern market-based financial system, the channel of contagion is through price changes and the measured risks and marked-to-market capital of financial institutions. When balance sheets are marked to market, asset price changes show up immediately on balance sheets and elicit response from financial market participants. Even if exposures are dispersed widely throughout the financial system, the potential impact of a shock can be amplified many-fold through market price changes.

Cosmological HII Bubble Growth During Reionization

We present general properties of ionized hydrogen (HII) bubbles and their growth based on a state-of-the-art large-scale (100 Mpc/h) cosmological radiative transfer simulation. The simulation resolves all halos with atomic cooling at the relevant redshifts and simultaneously performs radiative transfer and dynamical evolution of structure formation. Our major conclusions include: (1) for significant HII bubbles, the number distribution is peaked at a volume of $\sim 0.6 {\rm Mpc^{3}/h^{3}}$ at all redshifts. But, at $z\le 10$, one large, connected network of bubbles dominates the entire HII volume. (2) HII bubbles are highly non-spherical. (3) The HII regions are highly biased with respect to the underlying matter distribution with the bias decreasing with time. (4) The non-gaussianity of the HII region is small when the universe becomes 50% ionized. The non-gaussianity reaches its maximal near the end of the reionization epoch $z\sim 6$. But at all redshifts of interest there is a significant non-gaussianity in the HII field. (5) Population III galaxies may play a significant role in the reionization process. Small bubbles are initially largely produced by Pop III stars. At $z\ge 10$ even the largest HII bubbles have a balanced ionizing photon contribution from Pop II and Pop III stars, while at $z\le 8$ Pop II stars start to dominate the overall ionizing photon production for large bubbles, although Pop III stars continue to make a non-negligible contribution. (6) The relationship between halo number density and bubble size is complicated but a strong correlation is found between halo number density and bubble size for large bubbles.Comment: 10 pages, 14 figures; accepted version; higher resolution figures and supplementary material can be found at http://www.astro.princeton.edu/~msshin/reionization/web.ht