How to tackle shadow bankers? Prof. dr. Dirk Schoenmaker Dean, Duisenberg school of finance FSA Congres, 28 April 2011

What is shadow banking? Shadow banks are financial institutions that provide credit and do maturity transformation without access to central bank or deposit insurance So, banks that are not “officially” banks Examples: finance companies, structured investment vehicles, asset-backed paper vehicles, credit hedge funds, money market mutual funds, etc.

Law of communicating vessels

Why is it unknown? Cultural based explanation Shadow banks are operating in the shadow Hedge funds, etc are happy to keep low profile We all focus on the well-known: banks and insurers

Where do people look?

Why is shadow banking a problem?

Credit is growing outside traditional banking system

What is the problem? Problem Credit is driving consumption and asset prices “Unobserved” credit growth was driving housing and equity bubble in the US What do our problem-solvers do? How do central bankers and supervisors look at the banks under their supervision?

Do they look at the trees?

Or at the forest?

Macro- vs. Micro- prudential regulation

We need a system perspective Solution Not more micro-rules (which will be circumvented) But take a system-wide perspective Look at credit growth at banks and at market based shadow banks At Duisenberg school of finance We take an integrated system approach in our Master in Finance Programmes We are active in search for new macro-prudential tools -> on top of our research and teaching agenda

Solutions Monitor banking (credit growth) at system level Fed New York started thinking in 2009 The ECB has just recently (2011) decided to look at shadow banking in Europe Design macro-prudential tools with system-wide reach Loan-to-value ratios for mortgages Margin requirements for equity

Europeam Financial Integration 0809 Conclusions Traditional focus on banks, which are only part of the financial system Challenge: To monitor credit growth at shadow banks To design macro-prudential tools that work system-wide But focus still on micro-prudential rules for banks (Basel III) -> reinforces shift to shadow banking We need some “out of the micro-box” thinking at central banks! D. Schoenmaker 15

Europeam Financial Integration 0809 Background reading Adrian and Shin (2009), The Shadow Banking System: Implications for Financial Regulation, Federal Reserve Bank of New York Staff Reports, No. 382. Pozsar, Adrian, Ashcraft and Boesky (2010), Shadow Banking, Federal Reserve Bank of New York Staff Reports, No. 458. Oliver Wyman (2010), The Financial Crisis of 2015: An Avoidable History. Financial Stability Board (2011), Shadow Banking: Scoping the Issues. D. Schoenmaker 16