Regulating the Shadow Banking System
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The Collapse of Deposit Insurance and the Case for Abolition
THE COLLAPSE OF DEPOSIT INSURANCE — AND THE CASE FOR ABOLITION By Richard M. Salsman ECONOMIC EDUCATION BULLETIN Published by AMERICAN INSTITUTE FOR ECONOMIC RESEARCH Great Barrington, Massachusetts Copyright Richard M. Salsman 1993 About A.I.E.R. MERICAN Institute for Economic Research, founded in 1933, is an independent scientific and educational organization. The A Institute's research is planned to help individuals protect their personal interests and those of the Nation. Tìie industrious and thrifty, those who pay most of the Nation's taxes, must be the principal guardians of American civilization. By publishing the results of scientific inquiry, carried on with diligence, independence, and integrity, American Institute for Economic Research hopes to help those citizens preserve the best of the Nation's heritage and choose wisely the policies that will determine the Nation's future. The Institute represents no fund, concentration of wealth, or other special interests. Advertising is not accepted in its publications. Financial support for the Institute is provided primarily by the small annual fees from several thousand sustaining members, by receipts from sales of its publications, by tax-deductible contributions, and by the earnings of its wholly owned investment advisory organization, American Investment Services, Inc. Experience suggests that information and advice on eco- nomic subjects are most useful when they come from a source that is independent of special interests, either commercial or political. The provisions of the charter and bylaws ensure that neither the Insti- tute itself nor members of its staff may derive profit from organizations or businesses that happen to benefit from the results of Institute research. -
Shadow Banking
Federal Reserve Bank of New York Staff Reports Shadow Banking Zoltan Pozsar Tobias Adrian Adam Ashcraft Hayley Boesky Staff Report No. 458 July 2010 Revised February 2012 FRBNY Staff REPORTS This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessar- ily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors. Shadow Banking Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky Federal Reserve Bank of New York Staff Reports, no. 458 July 2010: revised February 2012 JEL classification: G20, G28, G01 Abstract The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation. Within the market-based financial system, “shadow banks” have served a critical role. Shadow banks are financial intermediaries that con- duct maturity, credit, and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, structured investment vehicles (SIVs), credit hedge funds, money market mutual funds, securities lenders, limited-purpose finance companies (LPFCs), and the government-sponsored enterprises (GSEs). Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system. Our de- scription and taxonomy of shadow bank entities and shadow bank activities are accom- panied by “shadow banking maps” that schematically represent the funding flows of the shadow banking system. -
Five Years After Dodd-Frank: Unintended Consequences and Room for Improvement
University of Pennsylvania ScholarlyCommons Wharton Public Policy Initiative Issue Briefs Wharton Public Policy Initiative 12-2015 Five Years after Dodd-Frank: Unintended Consequences and Room for Improvement David A. Skeel University of Pennsylvania Law School, [email protected] Follow this and additional works at: https://repository.upenn.edu/pennwhartonppi Part of the Economic Policy Commons, and the Public Policy Commons Recommended Citation Skeel, David A., "Five Years after Dodd-Frank: Unintended Consequences and Room for Improvement" (2015). Wharton Public Policy Initiative Issue Briefs. 11. https://repository.upenn.edu/pennwhartonppi/11 This paper is posted at ScholarlyCommons. https://repository.upenn.edu/pennwhartonppi/11 For more information, please contact [email protected]. Five Years after Dodd-Frank: Unintended Consequences and Room for Improvement Summary This brief offers a 5-year retrospective on Dodd-Frank, pointing out aspects of the legislation that would benefit from correction or amendment. Dodd-Frank has yielded several key surprises—in particular, the problematic extent to which the Federal Reserve has become the primary regulator of the financial industry. The author offers several recommendations including: clarification of the rules yb which strategically important financial institutions (SIFIs) are identified; overhauling the incentives offered to banks; instituting bankruptcy reforms that would discourage government bailouts; and easing regulatory burdens on smaller banks that are disproportionately -
How Does Monetary Policy Affect Shadow Bank Money Creation? I
How Does Monetary Policy Aect Shadow Bank Money Creation? ∗ Kairong Xiaoy June 17, 2016 Abstract This paper studies the impact of monetary policy on money creation of the shadow banking system. Using the U.S. money supply data over the past thirty years, I nd that shadow banks behave in the opposite way to commercial banks: shadow banks create more money exactly when the Fed tightens monetary policy to reduce money supply. Using a structural model of bank competition, I show that this phenomenon can be explained by clientele heterogeneity between the shadow and commercial banking sector. Monetary tightening allows commercial banks to charge higher prices on their depository services by driving up the opportunity cost of using cash. However, shadow banks cannot do so because their main clientele are more yield-sensitive. As a result, monetary tightening makes shadow bank money cheaper than commercial bank money, which drives marginal depositors of commercial banks to switch to shadow banks. My nding cautions against using monetary tightening to address nancial stability concerns, as it may unintentionally expand the shadow banking sector. ∗I am grateful to my thesis advisors Adlai Fisher, Lorenzo Garlappi, Carolin Pueger, and Francesco Trebbi for their generous support and guidance. I also benet from helpful comments from Markus Baldauf, Paul Beaudry, Jan Bena, Murray Carlson, Ron Giammarino, Will Gornall, Tan Wang, and seminar participants at the University of British Columbia. All errors are my own. ySauder School of Business, University of British Columbia. Email: [email protected] 1 1 Introduction Economists have traditionally focused on the role of commercial banks in the transmission of monetary policy. -
Regulation Shadow Banking
CNMV ADVISORY COMMITTEE RESPONSE TO THE FSB CONSULTATIVE DOCUMENTS: A POLICY FRAMEWORK FOR STRENGTHENING OVERSIGHT AND REGULATION OF SHADOW BANKING ENTITIES AND A POLICY FRAMEWORK FOR ADDRESSING SHADOW BANKING RISKS IN SECURITIES LENDING AND REPOS The CNMV's Advisory Commit tee has been set by the Spanish Securities Market Law as the consultative body of the CNMV. This Committee is composed by market participants (members of secondary markets, issuers, retail investors, intermediaries, the collective investment industry, etc) andRegulating its opinions areshadow independent banking from those of the CNMV. Outline 1.The shadow banking system. 1.1. Definition and importance of the shadow banking system. 1.2. The growth of the shadow banking system. 2. Regulating the shadow banking system. 2.1. Reasons for regulating shadow banking. 2.2. Potential regulatory strategies. 2.3. Reflections on differences in regulation across jurisdictions. Regulation in Spain. 3. The regulatory proposals of the FSB. 3.1. Comments on “A Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities”. 3.2. Comments on ““A Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos”. References 1 1. The shadow banking system 1.1. Definition and importance of the shadow banking system There are many alternative definitions of shadow banking. The Financial Stability Board (FSB) defines shadow banking as “credit intermediation involving entities and activities outside the regular banking system”, but other authors give complementary definitions that emphasize different aspects of shadow banking. For example: • Adrian and Ashcraft (2012) say it is “a web of specialized financial institutions that channel funding from savers to investors through a range of securitization and secured funding techniques”. -
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A Securitization-Based Model of Shadow Banking with Surplus Extraction and Credit Risk Transfer
A Securitization-based Model of Shadow Banking with Surplus Extraction and Credit Risk Transfer Patrizio Morganti∗ August, 2017 Abstract The paper provides a theoretical model that supports the search for yield motive of shadow banking and the traditional risk transfer view of securitization, which is consistent with the factual background that had characterized the U.S. financial system before the recent crisis. The shadow banking system is indeed an important provider of high-yield asset-backed securi- ties via the underlying securitized credit intermediation process. Investors' sentiment on future macroeconomic conditions affects the reservation prices related to the demand for securitized assets: high-willing payer (\optimistic") investors are attracted to these investment opportu- nities and offer to intermediaries a rent extraction incentive. When the outside wealth is high enough that securitization occurs, asset-backed securities are used by intermediaries to extract the highest feasible surplus from optimistic investors and to offload credit risk. Shadow banking is pro-cyclical and securitization allows risks to be spread among market participants coherently with their risk attitude. Keywords: securitization, shadow banking, credit risk transfer, surplus extraction JEL classification: E44, G21, G23 1 Introduction During the last four decades we witnessed to fundamental changes in financial techniques and financial regulation that have gradually transformed the \originate-to-hold" banking model into a \originate-to-distribute" model based on a securitized credit intermediation process relying upon i) securitization techniques, ii) securities financing transactions, and iii) mutual funds industry.1 ∗Tuscia University in Viterbo, Department of Economics and Engineering. E-mail: [email protected]. I am most grateful to Giuseppe Garofalo for his continuous guidance and support. -
Spider Woman
a reporter at lARgE spider woman Hunting venomous species in the basements of Los Angeles. bY buRKHARd BilgER arly one morning last year, when the of the brown recluse, but larger and lady! Spider lady! Come to the front!” streets of downtown Los Angeles more venomous. Sometime in the late Torres was standing by the cash register, wereE still mostly deserted, a strange figure nineteen-sixties, apparently, their ances- her hands on her hips. She made Binford appeared in the Goodwill store at 235 tors had ridden to California in costume scrawl out a waiver on a legal pad, then led South Broadway, next door to the Gua- crates owned by a troupe of Shakespear- her down a long, dingy hallway to the dalupe Wedding Chapel. She had on ten- ean actors from Brazil. A year or two basement door. “It’s your own risk,” she nis shoes, dungarees, and a faded blue later, they were discovered at a theatre said, pointing down the stairwell. “If I T-shirt, and was outfitted as if for a safari in the L.A. suburb of Sierra Madre don’t hear from you in two days, I call the or a spelunking expedition. A khaki vest and promptly triggered a citywide panic. authorities.” was stuffed with empty plastic vials; a “50 DeadlY SpideRS FOUND,” a front- black duffelbag across her shoulders held page headline in the Los Angeles Times piders have a bad reputation, largely a pair of high-tech headlamps, a digital announced on June 7, 1969. “VENom undeserved. The great majority aren’t camera, and a venom extractor. -
Bargaining in the Shadow of the Trial?
Bargaining in the Shadow of the Trial? Daniel D. Bonneau West Virginia University Bryan C. McCannon West Virginia University 09 March 2019∗ Abstract Plea bargaining is the cornerstone of the U.S. criminal justice system and the bargaining in the shadow of the trial framework, where the plea reached is driven primarily by the expected sentence arising from a trial, is the convention for applied economists. Criminologists and legal scholars challenge this framework. There has not been a test of the validity of the conceptual framework. We do so. We use a large data set of felony cases in Florida to estimate the plea discount received. Our identification strategy is to consider deaths of law enforcement officials, which we argue is a newsworthy tragic event affecting a local community and making violent crime salient to the citizens who make up the potential jury pool. Those cases, unrelated to the death, but already in process at the time and in the same location as the death, acts as our treated observations who experience an exogenous shock to their probability of conviction. We show that these individuals plea guilty to substantially longer sentences. This effect is especially strong for deaths of law enforcement officials who die via gunfire and are stronger when there is more internet search behavior out of local population. The reduction in the plea discount occurs across numerous serious crimes, but is essentially zero for less-serious crimes. Theory does not predict, though, what will happen to the trial rate since tougher offers from the prosecutor should lead to more trials, but the heightened conviction probability should encourage negotiation. -
The Many Panics of 1837 People, Politics, and the Creation of a Transatlantic Financial Crisis
The Many Panics of 1837 People, Politics, and the Creation of a Transatlantic Financial Crisis In the spring of 1837, people panicked as financial and economic uncer- tainty spread within and between New York, New Orleans, and London. Although the period of panic would dramatically influence political, cultural, and social history, those who panicked sought to erase from history their experiences of one of America’s worst early financial crises. The Many Panics of 1837 reconstructs the period between March and May 1837 in order to make arguments about the national boundaries of history, the role of information in the economy, the personal and local nature of national and international events, the origins and dissemination of economic ideas, and most importantly, what actually happened in 1837. This riveting transatlantic cultural history, based on archival research on two continents, reveals how people transformed their experiences of financial crisis into the “Panic of 1837,” a single event that would serve as a turning point in American history and an early inspiration for business cycle theory. Jessica M. Lepler is an assistant professor of history at the University of New Hampshire. The Society of American Historians awarded her Brandeis University doctoral dissertation, “1837: Anatomy of a Panic,” the 2008 Allan Nevins Prize. She has been the recipient of a Hench Post-Dissertation Fellowship from the American Antiquarian Society, a Dissertation Fellowship from the Library Company of Philadelphia’s Program in Early American Economy and Society, a John E. Rovensky Dissertation Fellowship in Business History, and a Jacob K. Javits Fellowship from the U.S. -
Bank Liability Insurance Schemes in the United States Before 1865∗
Bank Liability Insurance Schemes in the United States Before 1865∗ Warren E. Weber Federal Reserve Bank of Atlanta University of South Carolina May 2014 Abstract Prior to 1861, several U.S. states established bank liability insurance schemes. One type was an insurance fund; another was a mutual guarantee system. Under both, member banks were legally responsible for the liabilities of any insolvent bank. This paper hypothesizes that moral hazard was better controlled the more power and incen- tive member banks had to control other members' risk-taking behavior. Schemes that gave member banks both strong incentives and power controlled moral hazard better than schemes in which one or both features were weak. Empirical evidence on bank failures and losses on assets is roughly consistent with the hypothesis. Keywords: deposit insurance, moral hazard, banknotes JEL: E42, N21 ∗e-mail: [email protected]. This paper was written in large part while the author was at the Federal Reserve Bank of Minneapolis. I thank Todd Keister, Robert Lucas, Cyril Monnet, Arthur Rolnick, Eu- gene White, Ariel Zetlin-Jones, Ruilin Zhou, and participants at seminars at the Board of Governors, the Federal Reserve Bank of Chicago, and the University of South Carolina for helpful comments. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Banks of Atlanta or Minneapolis or the Federal Reserve System. 1 1. Introduction Moral hazard is inherent in all insurance. Bank liability insurance is not an exception, as our recent financial experience attests. Today, bank deposit liabilities are insured by the Federal Deposit Insurance Corporation (FDIC), established by the Banking Act of 1933. -
Shadow Banking Concerns: the Case of Money Market Funds∗
Shadow Banking Concerns: The Case of Money Market Funds∗ Saad Alnahedh† , Sanjai Bhagat‡ Abstract Implosion of the Money Market Fund (MMF) industry in 2008 has raised alarms about MMF risk-taking; inevitably drawing the attention of financial regulators. Regulations were announced by the U.S. Securities and Exchange Commission (SEC) in July 2014 to increase MMF disclosures, lower incentives to take risks, and reduce the probability of future investor runs on the funds. The new regulations allowed MMFs to impose liquidity gates and fees, and required institutional prime MMFs to adopt a floating (mark-to-market) net asset value (NAV), starting October 2016. Using novel data compiled from algorithmic text-analysis of security-level MMF portfolio holdings, as reported to the SEC, this paper examines the impact of these reforms. Using a difference-in-differences analysis, we find that institutional prime funds responded to this regulation by significantly increasing risk of their portfolios, while simultaneously increasing holdings of opaque securities. Large bank affiliated MMFs hold the riskiest portfolios. This evidence suggests that the MMF reform of October 2016 has not been effective in curbing MMF risk-taking behavior; importantly, MMFs still pose a systemic risk to the economy given large banks’ significant exposure to them. We propose a two-pronged solution to the MMF risk-taking behavior. First, the big bank sponsoring the MMF should have sufficient equity capitalization. Second, the compensation incentives of the big bank managers and directors should be focused on creating and sustaining long-term bank shareholder value. JEL classification: G20, G21, G23, G24, G28 Keywords: Money Market Funds, MMFs, Shadow Banking, SEC Reform, Bank Governance, Bank Capital, Executive Compensation ∗We thank Tony Cookson, Robert Dam, David Scharfstein, and Edward Van Wesep for constructive comments on earlier drafts of this paper.