Shadow banking: A distortion of the banking business

Shadow banking: A distortion of the banking business

Fecha: marzo 2023

Francisco del Olmo, Diego Aires, Fernando Rojas y Antonio Mota

Shadow banking

SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 2 (March 2023)

Since the onset of the financial crisis in the US in 2007, what has become known as the shadow banking system has attracted the attention of analysts, sparking growing concern about its role as a destabilising force. In the meantime, international financial system globalisation and innovation, coupled with regulatory trends across the world’s main regions, particularly in the area of bank solvency, have only increased the relative importance of the shadow banking system, particularly in the US and eurozone. Yet, it is noteworthy to examine the diverse factors underpinning the extension of shadow banking within these two regions. In the eurozone, although there are limitations given the lack of available financial literature on this topic, according to our empirical analysis, the expansion of shadow banking is mainly being driven by regulatory pressure, whereas in the US, the profitability of financial intermediation more broadly is the main impetus for shadow banking growth. Going forward, ongoing interest rate tightening, coupled with restrictive monetary policies, will drain financial system liquidity. At the same time, modified capital requirements for private equity and investment funds will entail high capital requirements for these types of vehicles. The combination of these two factors will foreseeably slow shadow banking growth.

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