Monthly Archives: November 2015

Shadows at the horizon – Breaking through Shadow Banking

From ESCP Europe Finance Society,
By
Soukaina Bouzri, Master Student

Escp Europe Finance Society

Shadow banking refers to the whole range of intermediaries that intermediate credit through complex funding techniques. Unlike the traditional banking system, which is shielded from runs because of insurance guarantees, the shadow banking system entails a very high level of risk. This very risk gathers momentum regarding the size of the system. Arguably, it is estimated in the US to be around 20 trillion $ whereas the bank credit running barely represents the half.

Thus, how do shadow banks serve a critical role in our financial system and how far should they come under regulators scrutiny?

First of all, let’s have a look at the process of credit intermediation in the shadow banking system. Credit intermediation can be divided in three parts: credit, maturity and liquidity transformation.

  • Credit transformation basically consists in lending to AA borrowers while issuing AAA liabilities
  • Maturity transformation is the use of short term deposits to…

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