Sunday, August 19, 2012

Shadow Banking is a Relatively New Financial Concept

In the past decade, the world created by the shadow banking system almost completely get rid of financial instruments, the structure of the financial system, the boundary between institutions and markets, but also to the regulatory system becomes accustomed to perform their duties at a loss. Which exposed the failure of monetary policy and financial regulatory oversight and other issues, after the international financial crisis begin to be deep introspection.

Shadow banking is a relatively new financial concept usually refers to the alienation from outside the traditional banking system, similar to the traditional banking business in the non-bank institutions. Shadow banking system, the most representative institutions including investment banks, mortgage finance companies, private equity funds and hedge funds. The investment bank, for example, the release to the market of credit default swaps (CDS) and other acts belong to the shadow banking business. Over the past five major U.S. independent investment bank, Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley, once a derivatives, asset securitization tools, and a higher level of security tools and then the creators of the most active and traders. They not only provide such financial instruments to investors, but also to provide liquidity support to act as credit intermediaries. Of course, the shadow banking system not only has the independent legal status, including financial institutions, but also covers the breakdown of various similar or alternative to traditional banking functions and financial instruments, only the specific accounts or financial instruments in the level before can be observed more clearly the complex shadow banking activities.

Shadow banking concept first in 2007, the annual meeting of the Federal Reserve have been proposed, it is the reason why "famous overnight", the international financial crisis is that under the current focus on traditional banking business, respectively, the financial markets of its trading business regulatory regime almost nothing. The main feature of the shadow banking: In addition to deposits, almost all of the banking business is business, but drifted away from the central bank and financial supervisory authorities of the jurisdiction system. On the one hand, because they do not directly take deposits, the shadow banking system, monetary authorities in the past largely free from regulation. On the other hand, its bank credit creation as well as outside of business and systemic risk, financial prudential supervision in the past, almost without restriction.

The existence of shadow banks have some reasonable, but it is for both the monetary and financial regulatory system poses a great challenge. The central bank's monetary policy and macro-control goals, the most important thing is the shadow of bank balance-sheet nature of the business or securities into the statistical standards, in order to grasp this information and make decisions based on adequate information. However, trying to include supervision of the shadow banking complex track is not an easy thing. Huge system and its more complex derived from the credit problem is the currency of the international financial crisis before the direct cause of the proliferation of liquidity, while the global economy in the post-crisis era in the context of slow recovery, the shadow banking activities in the recovery process also needs a .

Since it is a "shadow", there must be "true identity." Currently, the world's largest economy and international financial institutions advocated by the macro-prudential supervision of banks is to invest in the shadow of the "Law of mirrors." Based on the principle of macro-prudential requirements of the financial regulatory framework, banks (including commercial banks and investment banks) and various types of off-balance-sheet transactions must be reported to regulatory authorities, as regulators and rooms at the junction of monitoring probes installed in the same event suspicious and improper act, the regulatory authorities can be aware and ready for action. In addition, raising capital to asset protection, better estimate the importance of risk exposure of financial institutions that have the impact of the system, are of real banks and shadow banks, including all banks, including effective measures to strengthen supervision.

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