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Shadow Banking, Another Threat?

What is Shadow banking (SB)– a brief reminder:
Financial Stability Board (2012) defines SB as “credit intermediation involving entities and activities (fully or partially outside the regular banking system”.
A recent one by Claessens and Ratnovski (2014) is quite imperative for situating regulation, SB involves “all financial activities, except traditional banking, which rely on a private or public backstop to operate” (emphasis mine)
Involves risk transformation: credit, liquidity, maturity
Some examples (Claessens and Ratnovski, 2014):
Securitization – claims tranching, maturity transformation, liquidity puts from banks to SIVs, etc
Collateral services – e.g. supporting the efficient re-use of collateral in repo transactions, securities lending
Bank wholesale funding arrangement – use of collateral in repos and the operations of the tri-party repo market
Deposit-taking and/or lending by non-banks – insurance and bank-affiliated companies
The emphasis is to show that:
Non-traditional banking transactions are constructed to circumvent regulation and a rigorous regulatory oversight.
The instruments are not clearly understood, the operators difficult to trace
Finding backstop make room for target regulation (Claessens and Ratnovski, 2014):
Shows where new shadow banking risks resides
Explains why shadow banking poses huge macro-prudential and other regulatory challenges
Knowing the backstop helps regulators to pose the important questions
It suggests that the migration of risks from the regulated sector to shadow banking- often suggested as a possible unintended consequence of tighter bank regulation

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