Jackson: Shadow Banking and New Lending Channels – Past and Future

From “50 Years of Money and Finance: Lessons and Challenges”:

The history of shadow banking is one of shifts in the type of institution involved, and rate growth, but there are two common elements across the decades. Shadow banking has caused or been at the heart of various financial crises in different periods and one important factor behind its growth has been the style and extent of bank regulation. In the 1970s and 1980s the growth in shadow banking (then called secondary banking or non-bank banking) tended to be related to property lending and, even though it was not complex, the crises were sufficiently severe to require central bank/ government intervention. The 1990s steadily saw more and more complex structures being used in shadow banking peaking in 2007/8 and being central to the financial crisis. The Financial Stability Board (FSB)estimates that the size of the global shadow banking system grew from USD 26 trillion in 2002 to USD 62 trillion in 2007 (FSB (2012a)). One question is what lies ahead. The Basel III capital and liquidity buffers and wider uncertainty regarding future regulatory change have led to deleveraging and this in turn is leading shadow banking again to grow. The FSB (2012a) indicates that after falling slightly in 2008 shadow banking assets have now grown above 2007 levels but the market is focused more on traditional banking products than was the case pre-crisis. There has also been a proliferation of different types of lending channel. This chapter looks at the growth of shadow banking and the causes over the past four decades and looks forward at the way the industry could develop and the risks this could pose.


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