Wednesday, August 11, 2010

Shadow Banking (fg)

Ever wondered how shadow banking works? It is a 7 step procedure:
The shadow banking system, like the traditional banking system, has three actors: savers, borrowers, and—instead of banks—specialist non-bank financial intermediaries, or shadow banks. Unlike in the traditional banking system, however, savers do not place their funds with banks, but rather with money market mutual funds and similar funds, which invest these funds in the liabilities of shadow banks, which offer a spectrum of seniority and duration, and correspondingly, risk and return. Borrowers still get loans, leases and mortgages, but not only from depository institutions, but also from entities like finance companies.

Like the traditional banking system, the shadow banking system conducts credit intermediation. However, unlike the traditional banking system, where credit intermediation is performed “under one roof”—that of a bank—in the shadow banking system it is performed through a daisy-chain of non-bank financial intermediaries, and through a granular set of steps.

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The types of non-bank financial intermediaries and its main funding sources you find here.

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A great, but extensive summary of shadow banking is provided by FRSB New York

... and guess which entities were the most dominant players in European shadow banking? Douze points, German Landesbanken with its off-balance sheet special investment vehicles (conduits).