Wednesday, January 02, 2013

* Understanding the Risks Inherent in Shadow Banking

Staff at the Dallas Federal Reserve Bank have published a paper exploring how shadow banking relates to systemic risk and the recent financial crisis. The paper, Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned by David Luttrell, Harvey Rosenblum and Jackson Thies, is divided into two parts. "The first serves as a primer on shadow banking; the second provides a narrative of how the system froze during the financial crisis and pertinent lessons learned for the current reform effort." The paper explains shadow banking came about because technological advances opened up new avenues of credit. "The various other avenues of credit flow have been called the shadow banking system— so named because they intermediate credit with less transparency and regulation than in traditional banking. Shadow banks are at the center of our global market-based financial intermediation system, conducting maturity, liquidity, and credit transformation without explicit public sector credit guarantees or liquidity access."