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The rapid growth of the market-based financial system since the mid-1980s has changed the nature of financial intermediation.
Within the system, “shadow banks” have served a critical role, especially in the run-up to the 2007-09 financial crisis.
Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees.
The banks intermediate credit through a variety of securitization and secured funding techniques, including asset-backed commercial paper and securities, collateralized debt obligations, and repos.
New York Fed authors Adrian and Ashcraft, with former colleagues Boesky and Pozsar, analyze the institutional features of shadow banks, their economic roles, and their relation to traditional banks.
They emphasize that an understanding of the “plumbing” of the shadow banking system is an important underpinning for any study of financial system interlinkages.
The authors observe that while many reform efforts are focused on remediating the excesses of the recent credit bubble, increased capital and liquidity standards for depository institutions and insurance companies are likely to heighten the returns to shadow banks.
Shadow banking is therefore expected to be a significant part of the financial system, although quite possibly in a different form, for the foreseeable future.
Zoltan Pozsar is a senior advisor at the U.S. Treasury Department’s Office of Financial Research; Tobias Adrian is a vice president and Adam Ashcraft a senior vice president at the Federal Reserve Bank of New York; Hayley Boesky is a vice chairman at Bank of America Merrill Lynch.
The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.