Wednesday, December 14, 2011

The Nonbank-Bank Nexus and the Shadow Banking System

The present way of thinking about financial intermediation does not fully incorporate the rise of asset managers as a major source of funding for banks through the shadow banking system. Asset managers are dominant sources of demand for non-M2 types of money and serve as source collateral ‘mines’ for the shadow banking system. Banks receive funding through the re-use of pledged collateral ‘mined’ from asset managers.

Accounting for this, the size of the shadow banking system in the U.S. may be up to $25 trillion at year-end 2007 and $18 trillion at year-end 2010, higher than earlier estimates. In terms of policy, regulators will need to consider the re-use of pledged collateral when defining bank leverage ratios. Also, given asset managers’ demand for non-M2 types of money, monitoring the shadow banking system will warrant closer attention well beyond the regulatory perimeter.

IMF.Working Paper No. 11/289. Author/Editor:Pozsar, Zoltan ; Singh, Manmohan