What is Shadow Banking?
IMF Working Papers, February 11, 2014
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- What is Shadow Banking?
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Bibliographic details
- Authors: Stijn Claessens, Lev Ratnovski
- Published: February 11, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475597349.001
Summary
- The paper addresses widespread confusion about what constitutes shadow banking.
- Common associations include securitization, non-traditional bank activities, and non-bank lending.
- Most view shadow banking as activities that can create systemic risk.
- The paper proposes describing shadow banking as “all financial activities, except traditional banking, which require a private or public backstop to operate”.
- Backstops can be:
- franchise value of a bank or insurance company, or
- a government guarantee.
- The need for a backstop is presented as a crucial feature that distinguishes shadow banking from “usual” intermediated capital market activities (examples: custodians, hedge funds, leasing companies).
Definition and key feature
- Proposed definition: “all financial activities, except traditional banking, which require a private or public backstop to operate”.
- Crucial distinguishing feature: requirement of a private or public backstop to operate.
Backstops (forms and implications)
- Forms of backstops identified:
- franchise value of a bank or insurance company
- government guarantee
- Implication highlighted: activities that require such backstops are those most associated with the creation of systemic risk.
Distinction from intermediated capital market activities
- Activities not classified as shadow banking under the proposed definition include:
- custodians
- hedge funds
- leasing companies
- These are characterized as “usual” intermediated capital market activities that do not require a private or public backstop to operate.
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