The Shadow Banking System in the Euro Area: Definitions, Key Features and the Funding of Firms

Abstract

We investigate the size and evolution over time of shadow banks in the euro area, with a particular focus on their role in the funding of non-financial corporations (NFCs). Using an institution-based definition of shadow banks, which is consistent with available Eurosystem data, we find that, notwithstanding a significant heterogeneity across countries, the euro-area shadow banking system has grown in importance since the outburst of the global financial crisis. In addition, also its interconnectedness with the regulated banking system has increased over time. An econometric investigation shows that macroeconomic variables are the main determinants of the growth of loans to NFCs.

Macro determinants of shadow banking in Central and Eastern European countries

“…In line with these explanations, we expect for a positive and significant impact of the G.D.P. growth rate on our two dependent variables, which is consistent with the shadow banking procyclicality hypothesis mentioned by Adrian and Shin (2009) and empirically evidenced by Duca (2016), Hodula, Machacek, and Melecky (2017), and Malatesta et al (2016).…”

“…Moreover, the same approach is suggested by Bakk-Simon et al (2012) as appropriate for the euro area countries, since data can be easily retrieved from the Eurosystem's financial accounts. Besides excluding entities like M.M.F.s that are for sure engaged in shadow banking activities, another shortcoming of the above definition is that it includes intermediaries for which such a classification is sometimes considered to be questionable in the literature, like regulated investment funds (Malatesta et al, 2016). Therefore, we also took into account a second approach on shadow banking that excludes non-M.M.F.…”

“…For the euro area countries Malatesta, Masciantonio, and Zaghini (2016) show that the loans granted by shadow banks to N.F.C.s (which could largely be considered a measure of shadow banking activity) more than doubled during 1999-2014, and that the macroeconomic variables used to control for domestic demand and supply conditions (in particular, the real G.D.P. growth rate, inflation rate, and the term spread) are by far the main determinants of this dynamics.…”

Macroprudential Regulation and Leakage to the Shadow Banking Sector

“…Furthermore, we ensure in the calibration that the share of shadow bank intermediation in total intermediation is approximately one-third in steady state and that the size of the average shadow bank loan portfolio is one-third the size of shadow bank assets. These values are comparable to statistical figures derived in empirical studies in the euro area shadow banking sector based on similar data (Bakk-Simon et al, 2012;Malatesta et al, 2016) and resemble average values in our data set. The latter calibration allows us to treat σ S as a transformed parameter in the estimation, and the resulting post-estimation value is given by 0.944.…”

“…More precisely, we follow the institutional approach employed by ECB staff to apply the FSB broad defintion to available euro area data (Malatesta et al, 2016;Doyle et al, 2016;Bakk-Simon et al, 2012). The core of this approach depicts the use of the "Other MFIs.…”