The Shadow Banking System

[David Merrill]

There is probably the US Exchange Stabilization Fund too, but this is from the horse's mouth:

The Shadow Banking System

During a crisis, liquidity pressures can materialize in the shadow banking sector--that is, the set of nonbanks that use a range of markets and instruments to provide financing to borrowers. At the time of their initial difficulties, both Bear Stearns and Lehman Brothers were in the shadow banking system.

To help improve the resiliency of this sector, a few new regulations have been introduced...

[shikamaru]

This could not have come at a better time in my own personal studies.

I would throw in here off-balance sheet (incognito leverage) financing.

The magic and creation of shadows is due to classification.

I, personally, practice shadow banking.

[shikamaru]

Off-balance-sheet (Wikipedia.org)

Some highlights:

Off-balance sheet (OBS), or Incognito Leverage, usually means an asset or debt or financing activity not on the company's balance sheet. Total return swaps are an example of an off-balance sheet item.

Differences between on- and off-balance sheets

Traditionally, banks lend to borrowers under tight lending standards, keep loans on their balance sheets and retain credit risk—the risk that borrowers will default (be unable to repay interest and principal as specified in the loan contract). In contrast, securitization enables banks to remove loans from balance sheets and transfer the credit risk associated with those loans. Therefore, two types of items are of interest: on-balance sheet and off-balance sheet. The former is represented by traditional loans, since banks indicate loans on the asset side of their balance sheets. However, securitized loans are represented off the balance sheet, because securitization involves selling the loans to a third party (the loan originator and the borrower being the first two parties). Banks disclose details of securitized assets only in notes to their financial statements.

The Banking Example

A bank may have substantial sums in off-balance sheet accounts, and the distinction between these accounts may not seem obvious. For example, when a bank has a customer who deposits $1 million in a regular bank deposit account, the bank has a $1 million liability. If the customer chooses to transfer the deposit to a money market mutual fund account sponsored by the same bank, the $1 million would not be a liability of the bank, but an amount held in trust for the client (formally as shares or units in a form of collective fund). If the funds are used to purchase stock, the stock is similarly not owned by the bank, and do not appear as an asset or liability of the bank. If the client subsequently sells the stock and deposits the proceeds in a regular bank account, these would now again appear as a liability of the bank.

[shikamaru]

Shadow banking system (Wikipedia.org)

Highlights:

The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations.[1] The phrase "shadow banking" contains the pejorative connotation of back alley loan sharks. Many in the financial services industry find this phrase offensive and prefer the euphemism "market-based finance".[2]

Former US Federal Reserve Chair Ben Bernanke provided the following definition in November 2013:

"Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions — but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper [ABCP] conduits, money market funds, markets for repurchase agreements, investment banks, and mortgage companies"[3]

The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions - but it has been common practice for investment banks to conduct many of their transactions in ways that do not show up on their conventional balance sheet accounting and so are not visible to regulators or unsophisticated investors.[11] For example, prior to the 2007-2012 financial crisis, investment banks financed mortgages through off-balance sheet (OBS) securitizations (e.g. asset-backed commercial paper programs) and hedged risk through off-balance sheet credit default swaps.[11] Prior to the 2008 financial crisis, major investment banks were subject to considerably less stringent regulation than depository banks. In 2008, investment banks Morgan Stanley and Goldman Sachs became bank holding companies, Merrill Lynch and Bear Stearns were acquired by bank holding companies, and Lehman Brothers declared bankruptcy, essentially bringing the largest investment banks into the regulated depository sphere.

[lorne]

Bitcoin Black Friday ... if anyone wants to shop outside the central banking system of debt.

www.bitcoinblackfriday.com

[shikamaru]

Bitcoin Black Friday ... if anyone wants to shop outside the central banking system of debt.

www.bitcoinblackfriday.com

Do recall the primary purpose of banking is the creation of debt.