Richard Portes: Risks of Shadow Banking ,Market-Based Finance , Hedge Fund, Maturity Transformation.

Richard Portes: Risks of Shadow Banking ,Market-Based Finance , Hedge Fund, Maturity Transformation.
Chair:
Richard Portes, Professor, London Business School.
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Shadow banking, while providing alternative credit channels, poses several risks, including run risk, liquidity mismatch, and potential for excessive leverage. These risks can lead to systemic instability if left unchecked, impacting the broader financial system.
Here's a more detailed look at the risks:
1. Run Risk: Shadow banks, like traditional banks, can experience a run if investors lose confidence and demand their money back simultaneously. This is because shadow banks also engage in credit intermediation, where they lend money and take deposits, making them vulnerable to similar liquidity pressures as traditional banks.
2. Liquidity and Maturity Mismatch: Shadow banks often borrow short-term to finance long-term assets, creating a mismatch in liquidity and maturity. This mismatch can lead to problems if short-term funding becomes scarce, as they may not be able to readily sell their long-term, less liquid assets to meet those short-term obligations.
3. Excessive Leverage: Shadow banks, particularly in emerging markets, have seen rapid growth, and this growth has often been fueled by high leverage. This can amplify both profits and losses, making them more susceptible to market fluctuations and potential financial distress.
4. Systemic Risk: The interconnections between shadow banks and the traditional financial system can create systemic risk. If a shadow bank experiences difficulties, it can trigger a domino effect, potentially impacting banks and other financial institutions, as regulators are still grappling with the granularity of these interconnections.
5. Lack of Regulation: Shadow banks often operate outside of traditional banking regulations, which can lead to a lack of investor protection and potentially exacerbate systemic risk. The absence of deposit insurance or emergency lending facilities can make it harder for shadow banks to weather crises.
6. Increased Asset Price Volatility: The growth of shadow banking can contribute to increased asset price volatility, as it introduces additional leverage and liquidity into the market.
7. Regulatory Scrutiny: Recognizing these risks, regulators are increasingly scrutinizing shadow banks and exploring ways to mitigate these risks, including expanding the scope of information reporting and altering the regulatory perimeter to capture shadow-banking entities.

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Third ESRB annual conference -Session 2: Identifying and assessing risks in the shadow banking system

The EU shadow banking system has grown significantly in recent years. This reinforces the need to develop a framework to monitor risks in this part of the financial sector. Such a risk monitoring framework is a key part of a broader macroprudential strategy. This session discussed potential financial stability risks and key elements which should be considered when monitoring risks and vulnerabilities in the shadow banking system.

Chair:
Richard Portes, Professor, London Business School

Speakers:
Rustom Irani , Professor, University of Illinois
Sujit Kapadia, Head of Division, European Central Bank
Catherine Lubochinsky, Professor, University Paris 2
   • Third ESRB annual conference: Session...