The international financial system (IFS) has grown over the past decade. One of its developments is the shadow banking system which performs roles such as maturity and liquidity transformation. The 2007/2008 global recession has once again shown that the global economy is inter-connected as the effects of the financial crisis were propagated from the US to the less developed world. This has further exposed the weaknesses in the IFS which include lack of supervision and proper regulation in the financial activity, shadow banking activities being cited as one of the key areas that lack proper regulation.This paper assesses the risks and/or concerns of shadow banking as a part of the IFS.
Table of Contents
1. INTRODUCTION
2. WHAT IS SHADOW BANKING?
3. RISKS ASSOCIATED WITH SHADOW BANKING
3.1 (i) Transmission of risks from the regular banking system
3.2 (ii) High Leverage
3.3 (iii) Avenue for bypassing rules
3.4 (iv) Creation of bank-like runs
4. RISKS ASSOCIATED WITH SHADOW BANKING IN SOUTH AFRICA
5. CONCLUSION
Objectives and Topics
This paper aims to assess the inherent risks and concerns associated with the shadow banking system within the context of the international financial system. It investigates how shadow banking entities operate, their role in global financial instability, and their specific presence and regulation within the South African market.
- Definition and functional role of shadow banking
- Mechanisms of risk transmission between shadow and regular banking systems
- Systemic risks, including high leverage and bank-like runs
- Regulatory challenges and the impact of Basel III
- Evaluation of the South African shadow banking sector
Excerpt from the Book
RISKS ASSOCIATED WITH SHADOW BANKING
Despite a number of benefits derived from the presence of shadow banking activities in the financial system, such as risk diversification channel and provision of an alternative avenue for investors to save or invest, there are a number of risks associated with shadow banking. Such risks include:
(i) Transmission of risks from the regular banking system
Shadow banks are closely linked with the regular banking system. In fact, some of the regular banks form part of the shadow banking system. It is therefore feared that the risks associated with the shadow banking system can be easily propagated to the regular banking system, (FSB, 2011:1). Similarly, risks likely to be experienced by shadow banks, such as large and unexpected sales of assets that may have direct effect on financial assets prices, may be transmitted to the traditional banking system, leading to instability in the financial system (FSB, 2012:5).
(ii) High Leverage
Since shadow banks do not take deposits, they are subject to less regulation relative to the regular banks. They can therefore easily increase rewards they get from investments by leveraging up much more than those in the regular or traditional banking system. In case there are disruptions in the credit system, the only choice shadow banks have is selling off their long-term assets to clear their debts (Roubini, 2008). This poses as a source of systematic risk for the financial system (FSB, 2012:5).
Summary of Chapters
1. INTRODUCTION: This chapter outlines the global economic fragility following the 2007/2008 recession and introduces the evolution of the international financial system and shadow banking.
2. WHAT IS SHADOW BANKING?: This chapter defines shadow banking as credit intermediation outside the regular system and highlights its role in risk transfer and maturity transformation.
3. RISKS ASSOCIATED WITH SHADOW BANKING: This chapter details specific dangers, including risk transmission, high leverage, rule evasion, and the propensity for bank-like runs.
4. RISKS ASSOCIATED WITH SHADOW BANKING IN SOUTH AFRICA: This chapter examines the smaller scale of shadow banking in South Africa and discusses the impact of Basel III regulations.
5. CONCLUSION: This chapter summarizes the necessity for oversight and the need for the South African financial system to remain vigilant against potential collapses.
Keywords
Shadow banking, international financial system, financial crisis, risk transmission, leverage, credit intermediation, regulation, Basel III, South Africa, systemic risk, liquidity transformation, financial stability, banking supervision, asset prices, economic growth.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on identifying and assessing the risks posed by the shadow banking system, which operates outside of traditional regulatory frameworks.
What are the main thematic areas covered in the text?
The core themes include the definition of shadow banking, its impact on global financial stability, the transmission of risks, and the specific regulatory environment in South Africa.
What is the core research goal of the work?
The goal is to analyze why shadow banking warrants concern and to understand how its lack of supervision contributes to broader financial system vulnerability.
Which methodology is applied in the research?
The author employs a literature review and synthesis of reports from institutions like the Financial Stability Board (FSB) to evaluate financial risks.
What does the main body of the paper explore?
The main body examines the specific mechanics of shadow banking risks, such as high leverage and rule bypassing, and transitions to a regional analysis of South Africa.
Which keywords best describe this study?
Key terms include shadow banking, systemic risk, financial regulation, and liquidity transformation.
How does shadow banking differ from traditional banking in terms of regulation?
Shadow banks do not accept deposits and therefore operate with significantly less regulation and oversight than traditional commercial banks.
What effect does the author suggest Basel III might have on shadow banking in South Africa?
The author discusses concerns that while Basel III aims to stabilize the economy, it might inadvertently push more activities into the unregulated shadow banking sector.
- Arbeit zitieren
- Patricia Madigele (Autor:in), 2012, Shadow banking. Financial Market Analysis, München, GRIN Verlag, https://www.hausarbeiten.de/document/269625
