Shadow Banking


What is Shadow Banking?


The key characteristics of shadow banking as conceived by regulators are credit intermediation in the capital markets, maturity transformation, leverage, and susceptibility to runs. The principal shadow banking activities and entities identified by regulators include the following:

  • Securitization vehicles such as asset-backed commercial paper conduits (ABCP) and structured investment vehicles (SIVs);
  • Securities lending;
  • Repurchase agreements;
  • Money market funds;
  • Securities broker-dealers;
  • Investment funds, including exchange traded funds and hedge funds that provide credit or are leveraged;
  • Finance companies, including auto finance companies and leasing companies;
  • Providers of credit insurance and financial guarantees.

Do Banks BHC /FHC participate in Shadow Banking?


All of the activities classified by regulators as shadow banking are core activities of large banking organizations, both directly and through affiliated entities. It is anomalous to call them “shadow” activities since they occur in the supervisory headlights of banking regulators.

The shadow banking system could not exist without banks and their affiliates. Banks are instrumental in the securitization of assets, which forms the backbone of the shadow banking system. They have been the primary sponsors, issuers, and guarantors of mortgage-backed securities and asset-backed commercial paper for years. Large banks command the repo market as borrowers, lenders, dealers, and custodian banks. They are leaders in securities lending activities. Banks also sponsor and advise numerous types of investment funds, including hedge funds and approximately one-half of all money market funds. All of the major securities broker-dealers in the United States are subsidiaries of banks or bank holding companies. Banking organizations control finance companies of all kinds, including auto finance and leasing companies. They provide credit insurance and financial guarantees to support their activities and those of their customers. To the extent shadow banking has any meaning, regulated banks and their affiliates are an integral part of it.

From Shadow Banking 2010 Zoltan Pozsar

Shadow credit intermediation includes three broad types of activities, differentiated by their strength of official enhancement: implicitly-enhanced, indirectly-enhanced, and unenhanced. The shadow banking system has three sub-systems which intermediate different types of credit, in fundamentally different ways. The government-sponsored shadow banking sub-system refers to credit intermediation activities funded through the sale of Agency debt and MBS, which mainly includes conforming residential and commercial mortgages. The “internal” shadow banking sub- system 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. Finally, the “external” shadow banking sub-system refers to the credit intermediation process of diversified broker-dealers (DBDs), and a global network of independent, non-bank financial specialists that include captive and standalone finance companies, limited purpose finance companies and asset managers. 

Why did Shadow Banking arise?


The principal drivers of the growth of the shadow banking system have been the transformation of the largest banks since the early-1980s from low return on-equity (RoE) utilities that originate loans and hold and fund them until maturity with deposits, to high RoE entities that originate loans in order to warehouse and later securitize and distribute them, or retain securitized loans through off- balance sheet asset management vehicles. In conjunction with this transformation, the nature of banking changed from a credit-risk intensive, deposit-funded, spread-based process, to a less credit-risk intensive, but more market-risk intensive, wholesale funded, fee-based process. The transformation of banks occurred within the legal framework of financial holding companies (FHC), which through the acquisition of broker-dealers and asset managers, allowed large banks to transform their traditional process of hold-to-maturity, spread-banking to a more profitable process of originate-to-distribute, fee-banking.



Key Sources of research:


Shadow Banking

Pozsar, Zoltan; Adrian, Tobias; Ashcraft, Adam; Boesky, Hayley (2010)


Click to access 635902451.pdf


Regulating the Shadow Banking System




Click to access 2010b_bpea_gorton.PDF


Bagehot was a Shadow Banker: Shadow Banking, Central Banking, and the Future of Global Finance
Perry Mehrling , Zoltan Pozsar , James Sweeney , Daniel H. Neilson

November 5, 2013





What is Shadow Banking?
Stijn Claessens , Lev Ratnovski

February 2, 2015


Shadow banking: A review of the literature

Adrian, Tobias; Ashcraft, Adam B. (2012)


Click to access 72934388X.pdf


Shadow Banking Regulation
Tobias Adrian

Adam B. Ashcraft

April 1, 2012


Shadow Banking: Economics and Policy

Stijn Claessens, Zoltan Pozsar, Lev Ratnovski, and Manmohan Singh


Click to access sdn1212.pdf


Shadow Banking: The Money View
Zoltan Pozsar

July 2, 2014


Securitized banking and the run on repo

Gary Gorton Andrew Metrick

Click to access Gorton-Metrick-run-on-the-Repo.pdf


Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007
Gary B. Gorton

May 9, 2009


Three Principles for Market-based Credit Regulation

Perry Mehrling

December 31, 2011


Shadow banks and macroeconomic instability

Roland Meeks,Benjamin D Nelson and Piergiorgio Alessandri

Click to access wp487.pdf


Is Shadow Banking Really Banking?


Click to access shadow_banking.pdf


The global financial crisis and the shift to shadow banking

Nersisyan, Yeva; Wray, L. Randall (2010)

Click to access 621628174.pdf


The Nonbank-Bank Nexus and the Shadow Banking System

Zoltan Pozsar and Manmohan Singh



Banks, Shadow Banking, and Fragility

Luck, Stephan; Schempp, Paul (2015)



The Growth of Modern Finance

Robin Greenwood

David Scharfstein

July 2012

Click to access Greenwood-Scharfstein.pdf


Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System

Zoltan Pozsar

Click to access 8ae8ad1c-c43a-11e0-ad9a-00144feabdc0.pdf



By Melanie L. Fein

February 15, 2013

Click to access 2013–Shadow_banking_March_4.pdf


Shadow Banking and the Funding of the Nonfinancial Sector


Joshua Gallin 2013

Click to access 201350pap.pdf


Mapping the Shadow Banking System Through a Global Flow of Funds Analysis

Luca Errico, Artak Harutyunyan, Elena Loukoianova, Richard Walton, Yevgeniya Korniyenko, Goran Amidžić, Hanan AbuShanab, Hyun Song Shin


Click to access 0deec52f13ce3ceefa000000.pdf


What Drives the Shadow Banking System in the Short and Long Run?

John V. Duca


Click to access wp1401.pdf


The Economics of Shadow Banking

Manmohan Singh

Click to access singh.pdf


Financial stability policies for shadow banking

Adrian, Tobias (2014)

Click to access 779367677.pdf


How Capital Regulation and Other Factors Drive
the Role of Shadow Banking in Funding Short-Term Business Credit

John V. Duca

October 2014

Click to access Duca%20Paper.pdf


A Macro View of Shadow Banking: Levered Betas and Wholesale Funding in the Context of Secular Stagnation

Zoltan Pozsar

January 31, 2015


Shadow Bank Monitoring

Tobias Adrian, Adam B. Ashcraft, and Nicola Cetorelli

September 2013

Click to access 771630980.pdf


Shedding Light on Shadow Banking

Artak Harutyunyan, Alexander Massara, Giovanni Ugazio, Goran Amidzic, and Richard Walton


Click to access 05supbanc.pdf


Shadow banks and macroeconomic instability

Roland Meeks,Benjamin D Nelson and Piergiorgio Alessandri


Click to access wp487.pdf


Do contractionary monetary policy shocks expand shadow banking?

Benjamin Nelson, Gabor Pinter and Konstantinos Theodoridis

January 2015

Click to access wp521.pdf


Shadow Banking: Policy Challenges for Central Banks

Thorvald Grung Moe


Click to access 786536284.pdf


Sizing Up Repo 

Arvind Krishnamurthy Stefan Nagel

Dmitry Orlov

June 2012

Click to access KrishnaNagelOrlov12.pdf


Securitization, Shadow Banking, and Bank Regulation

Julian Kolm

September, 2015


Click to access Securitization_and_Bank_Capital_Regulation.pdf


Monetary Policy, Financial Conditions, and Financial Stability

Tobias Adrian and Nellie Liang

September 2014

Click to access 796909652.pdf


Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned


David Luttrell

Harvey Rosenblum

Jackson Thies


Click to access staff1203.pdf


Runs on Money Market Mutual Funds

Lawrence Schmidt† Allan Timmermann Russ Wermers§

June 20, 2014

Click to access Schmidt_Timmermann_Wermers.pdf



The Rise and Fall of the Shadow Banking System


Zoltan Pozsar


The Macroeconomics of Shadow Banking
Alan Moreira  Alexi Savov

April 29, 2016


Repo Runs

Antoine Martin David Skeie Ernst-Ludwig von Thadden

Click to access sr444.pdf


Repo Runs: Evidence from the Tri-Party Repo Market

Adam Copeland, Antoine Martin, and Michael Walker

August 2014

Click to access sr506.pdf


Who Ran on Repo?

Gary Gorton, Andrew Metrick

October 4, 2012

Click to access whorancompleteoctober4.pdf


Shadow Banking and the Funding of the Nonfinancial Sector


Joshua Gallin 2013

Click to access 201350pap.pdf


The Evolution of a Financial Crisis: Panic in the Asset-Backed Commercial Paper Market
Daniel Covitz, Nellie Liang, and Gustavo Suarez

August 18, 2009


Click to access 200936pap.pdf


The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market
Daniel M. Covitz Nellie Liang Gustavo Suarez

April 5, 2012


The Economics of Structured Finance

Joshua Coval, Jakub Jurek, and Erik Stafford



Click to access 09-060.pdf


The Rise of the Originate- to-Distribute Model and the Role of Banks in Financial Intermediation

Vitaly M. Bord and João A. C. Santos


Click to access 1207bord.pdf



Adam B. Ashcraft

Til Schuermann

March 4, 2008

Click to access 0743.pdf


Repo and Securities Lending

Tobias Adrian, Brian Begalle, Adam Copeland, and Antoine Martin

February 2013

Click to access sr529.pdf


Author: Mayank Chaturvedi

You can contact me using this email mchatur at the rate of AOL.COM. My professional profile is on

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