Shadow Banking

"Shadow Banking"

Original Report by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft and Hayley Boesky of the Federal Reserve Bank of NY

Highlights:

- Shadow banks are financial intermediaries that conduct maturity, credit and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees

- Shadow credit intermediation performs an economic role similar to that of traditional banks’ credit intermediation. The shadow banking system decomposes the simple process of retail-deposit-funded, hold-to-maturity lending conducted by banks into a more complex, wholesale-funded, securitization-based lending process.

The shadow banking system has three subsystems: 1. The government-sponsored shadow banking subsystem refers to credit intermediation activities funded through the sale of agency debt and MBS. 2. The “internal” shadow banking subsystem refers to the credit intermediation process of a global network of banks, finance companies, broker-dealers, and asset managers and their on- and off-balance-sheet activities—all under the umbrella of financial holding companies. 3. The “external” shadow banking subsystem refers to the credit intermediation process of diversified broker-dealers and a global network of independent, limited-purpose finance companies and asset managers.

- Shadow banks are expected to be an important part of the financial system for the foreseeable future

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