GE and the Shadow Banking Landscape

Abstract

The case examines the rationale for why shadow banking exists, what role it plays in the financial system, and the risks that it may pose. In the case, an analyst in an investment fund is tasked to examine in greater detail the decision by GE to divest GE Capital. Understanding the rationale for this transaction, the role of GE Capital in the financial system, and the potential risks for the financial system would be important for the analyst's decision. This case would fit well in a second-year MBA elective course on Financial Institutions or Capital Markets. Excerpt UVA-F-1761 Oct. 3, 2016 GE and the Shadow Banking Landscape Well, my plan is more comprehensive. And frankly, it's tougher because of course we have to deal with the problem that the banks are still too big to fail…But we also have to worry about some of the other players—AIG, a big insurance company; Lehman Brothers, an investment bank. There's this whole area called “shadow banking.” That's where the experts tell me the next potential problem could come from. I want to make sure we're going to cover everybody, not what caused the problem last time, but what could cause it next time. —Hillary Clinton, Democratic presidential candidate 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 mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies. Before the crisis, the shadow banking system had come to play a major role in global finance. . . .