Shadow banking: balance benefits and risks, say MEPs | News | European Parliament (2024)

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Shadow banking: balance benefits and risks, say MEPs | News | European Parliament? ›

MEPs say that shadow banking should be better monitored and supervised, so as to reduce the systemic risks they pose without cutting of the benefits that they provided to the real economy.

This is a positive benefit for the economy because it acts as an additional source of lending, and provides diversification in the financial system. On the other hand, there is the risk that shadow banking can contribute to too much lending in the economy. This has the potential to lead to a harmful downturn.

During the financial crisis, the development of shadow banking may also be seen as a source of systemic risk, defined as the risk of threats to financial stability that impair the functioning of a large part of the financial system with significant adverse effects on the broader economy (De Bandt, Hartmann, 2000, ...

These definitions highlight two quintessential characteristics of shadow banks. One, they operate in the shadows without access to FDIC insurance. The other is that Page 26 because shadow banks do not have explicit access to the government safety net, they do not operate under the same regulatory constraints.

Shadow banking is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are. The shadow banking system played a major role in the expansion of housing credit in the run-up to the 2008 financial crisis.

Commercial banks engage in maturity transformation when they use deposits, which are normally short term, to fund loans that are longer term. Shadow banks do something similar. They raise (that is, mostly borrow) short-term funds in the money markets and use those funds to buy assets with longer-term maturities.

The major risks faced by banks include credit, operational, market, and liquidity risks. Prudent risk management can help banks improve profits as they sustain fewer losses on loans and investments.

The Global Shadow Banking Market is anticipated to rise at a considerable rate during the forecast period, between 2022 and 2031. In 2021, the market is growing at a steady rate and with the rising adoption of strategies by key players, the market is expected to rise over the projected horizon.

2 During the financial crisis, the system came under severe strain, and many parts of it collapsed. The emergence of shadow banking thus shifted the systemic risk-return trade-off toward cheaper credit intermediation during booms, at the cost of more severe crises and more expensive intermediation during downturns.

Shadow banking activities aren't necessarily illegal, although the institutions involved sometimes do illegal things.

Is BlackRock a shadow bank? ›

Influence and power. Due to its power and the sheer size and scope of its financial assets and activities, BlackRock has been called the world's largest shadow bank.

The name refers to financial businesses that aren't regulated in the same ways as conventional banks—including hedge funds, payday lenders, private equity firms, asset managers (like BlackRock and Vanguard), fintech companies (PayPal), mortgage servicers, insurance providers, and even Sotheby's, which now makes loans ...

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.

Nonbank lenders, often called "shadow banks," now have $52 trillion in assets, a 75% increase since the financial crisis ended. The industry was at the center of the financial crisis when the subprime mortgage market collapsed.

As of 2013, academic research has suggested that the true size of the shadow banking system may have been over $100 (~$131.00 in 2023) trillion in 2012. According to the Financial Stability Board the sector's size grew to $100 (~$124.00 in 2023) trillion in 2016.

These risks are: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation. These categories are not mutually exclusive; any product or service may expose the bank to multiple risks.

High-risk products or services involve: (i) unlimited third-party transactions (e.g., demand deposit accounts) (ii) limited transparency (e.g., Internet banking, prepaid access, ATM, trust), and: (iii) significant international transactions (e.g., correspondent banking).