Is shadow banking really banking?

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Bryan J. Noeth; Rajdeep Sengupta;
  • Subject: Banks and banking ; Financial risk management ; Financial crises

To those who don't know, the term "shadow banking" probably has a negative connotation. This primer draws parallels between what has been termed the shadow banking sector and the traditional banking sector—showing that they are similar in many ways.
  • References (24)
    24 references, page 1 of 3

    Brothers in September 2008. This led to a direct default on commercial paper issued by Lehman Brothers, $785 million of which was held by the Reserve Primary Fund-one of the largest MMMFs, with more than $65 billion in assets. Needless to say, the news of exposure triggered a run on this fund and quickly spread to other MMMFs. To stem the run on MMMFs, the U.S. Treasury announced a temporary deposit insurance covering all money market instruments only three days aeftr the collapse of Lehman.

    1, 2, 11, 14 See Adrian, Ashcraft, Boesky and Pozsar.

    3 Strictly speaking, this description fits commercial banks, which along with thrift institutions (savings and loans and credit unions) make up the set of depository institutions in the U.S.

    4 In addition, credit intermediation involves “brokerage,” whereby the bank also reduces preand post-contractual informational asymmetries between the borrower and the lender. Note that this brokerage function is not necessarily exclusive to credit intermediation because many other intermediaries, such as used-car dealers, perform a similar function. For more, see work by Greenbaum and Thakor.

    5 This key insight developed by Bryant and formal - ized in Diamond and Dybvig is arguably the most celebrated work in banking theory.

    6 See Diamond and Dybvig.

    7 See Wheelock and Wilson.

    8 See Morrison and White.

    9 See Admati, DeMarzo, Hellwig and Pfleiderer.

    10 See Anderson and Gascon for details on MMMFs and ABCPs.

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