Shadow banking : a European perspective

Abstract

The aim of this thesis is to examine shadow bankin g, paying particular attention to European securitisation markets, collateral intermediation, and money market funds. The term wa s introduced following the 2007 - 2008 financial crisis to describe credit intermediation activities undertaken partially or full y outside the regulated banking system, without explicit access to public sector backstops. The shadow banking sector’s dependency on short - term, wholesale funding renders it vulnerable to market turmoil, which in turn can affect the broader financial syst em through the sector’s close connection with financial institutions and key markets. In order to contextualize this topic the first chapter describes how credit intermediation is conducted within certain sectors of the shadow banking system, and what su pply and demand - side factors precipitated the rise of the system. The initial chapter also offers a brief overview of shadow banking’s role in the financial crisis, since the evolution of the term and the on - going discourse surrounding it is closely tied t o the stressed market conditions witnessed at the time . While initially, the thesis is most relevant in a US context since it was there the financial innovations discussed have been developed and widely adopted, the second chapter provides a n assessment of the European system. First, by performing a macro - mapping exercise aimed at providing a broad measure of the shadow banking system, and second, by conducting a more detailed analysis of institutions that serve as the focus for this thesis. The thesis demo nstrates that European shadow banking institutions fund the extension of credit, that they are important intermediaries in the short - term funding markets, and that they support a host of financial transactions. Although prevailing commentary on shadow bank ing has highlighted the systemic risk brought about by shadow banking, this thesis seeks to take a balanced view of the sector, also emphasising its positive impact on overall markets.