The role of shadow banking entities in the financial crisis: a disaggregated view

Abstract

This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent repository link ABSTRACTThis article examines the role of the shadow banking system in the global financial crisis of 2007-9. In order to do this, one must first explain the reasons for the explosive growth of shadow banking in the immediate precrisis era. Current explanations for this growth tend to hold two contrasting positions: one emphasising factors endogenous to the banking sector (notably regulatory arbitrage and financial innovation); the other emphasising exogenous factors (notably the 'search for yield'). Integrating these two explanations, in this article we develop a disaggregated view of the shadow banking system. After clarifying the nature of the relation between the regulated and shadow banking systems, we inquire more closely into the different entities that inhabit the shadow banking system, the different activities that these entities performed and the different financial products that these entities supplied. The disaggregated view of shadow banking suggests that while some parts of the system played an important role in the initial subprime phase of the crisis through their involvement with the toxic securities that were at its centre, other parts of the system were key to the subsequent money and inter-bank phases of the crisis through their close ties with the regulated banks.

A Crisis of the Overcrowded Future: Shadow Banking and the Political Economy of Financial Innovation

“…Their emergence was enabled by the regulators and facilitated by the government, and these non-banking institutions have been playing an important function in the credit intermediation process (McIntire 2014). Second, there is a wide recognition that the shadow banking system is important to financial stability, having played a major role in the global financial crisis (McCulley 2009, Pozsar et al 2013, Lysandrou and Nesvetailova 2014. As Krugman noted:…”

Financial–Real-Side Interactions in an Extended Monetary Circuit with Shadow Banking: Loving or Dangerous Hugs?

“…The functional role of equities in or analysis is captured by the obligations of non-financial firms. 14 See Goda and Lysandrou (2014), and Lysandrou and Nesvetailova (2014) on the role of wealth concentration in feeding the demand for ABSs and CDOs. 15 In Matrix 3b, payment flows associated to CDSs are reported with both a positive and negative sign.…”

Lehman Brothers in the Dutch offshore financial centre: the role of shadow banking in increasing leverage and facilitating debt

“…A range of scholars has challenged the allegedly efficient brokerage role of non-banks and argued that shadow banking rather needs to be understood as one of the root causes of the current crisis (Bengtsson, 2013;Lysandrou & Nesvetailova, 2014;Nesvetailova, 2015;Palan & Nesvetailova, 2013;Rixen, 2013;Thiemann, 2014). The fact that such bank-like activities have fallen off the radar of state regulation is particularly highlighted.…”

“…For example, Rixen (2013) and Thielmann (2014) ascribe the absence of 'effective' regulation and the presence of regulatory loopholes to competition among jurisdictions, arguing that domestic regulators have been 'cognitively captured' by yield-seeking financial investors. Similarly, Lysandrou and Nesvetailova (2014) refer to 'unregulated financial innovation' and 'external pressures on the banking system'. Even though this literature provides trenchant empirical insights on institutional responses to investor demands, it is also incomplete in what it highlights.…”