Supervisors info:
α)Καθηγητής Χ. Γκόρτσος, Νομική, ΕΚΠΑ
β)Καθηγητής Γ. Δελλής, Νομική, ΕΚΠΑ
γ)Αναπλ. Καθηγ. Π. Μουζουράκη, Νομική, ΕΚΠΑ
Summary:
The shadow banking system is defined by the Financial Stability Board (FSB) as “a system of credit intermediation that involves entities and activities outside the regular banking system”. This means that the only way to identify the shadow banking activity is based on two intertwined pillars: entities operating outside the regular banking system, examined through the activities they perform and activities that act as important sources of funding of these non-bank entities. In this spectrum, only non-bank intermediaries, which operate in a seemingly similar way with traditional banks meaning performing banking intermediation, creating excessive leverage, maturity and liquidity transformation, and credit risk transfer, can be considered as shadow banks because of the fact that they pose threats, risks and adverse effects to financial stability, and especially, because of the danger of a regulatory arbitrage happening. That is why these activities contributed in the outbreak of the Global Financial Crisis in 2007-2009, especially in the USA, where it was blamed by the U.S. Treasury Secretary Timothy Geithner, later President and CEO of the New York Federal Reserve Bank, as the main reason for the “freezing” of the credit markets. Indeed, shadow banks are not traditional, commercial banks and thus are not subject to the same regulation and supervision, nor central bank facilities or safety net arrangements, and that leads to high potentiality of risks and vulnerability. In particular, these financial intermediaries (i.e. money market funds, private equity funds, hedge funds, securitization vehicles, securities lenders, and structured investment vehicles, investment banks and mortgage brokers) which operate the shadow-banking activities, mostly in tax heavens, facilitate the creation of huge amount of credit across the global financial system. In contrast with commercial banks, they do not take deposits to lend out to borrowers, but the credit they give is based on short –term funds that come from investors. That is where the problem begins. Since their funds are provided by asset-backed commercial paper or by the repo market, it is clear that credit and liquidity risks are high and if not regulated and managed, can cause significant damage to the financial system and ,of course, to the borrowers of the shadow banking system. However, the entities and participants of this system are numerous, the percentage of the total financial system is remarkable, its assets’ worth is counted in trillions and at the same time is highly unregulated, making it appealing and dangerous at the same time. However, is this infamous yet profiting industry fairly blamed for all the failures and inefficiencies? How can we make it work so that we gain all the profit and succeed to manage and minimize the risks? How can the financial sector and its participants trust a system that is called “shadow” anyway? We are going to examine all these in the following pages.
