Mapping the Interconnectedness between EU Banks and Shadow Banking Entities

Jorge Abad,Marco D'Errico,Vera Luz,Tuomas Peltonen,Richard Portes,Teresa Urbano,Neill Killeen

doi:10.2139/ssrn.3723386

Abstract

This paper provides a unique snapshot of the exposures of EU banks to shadow banking entities within the global financial system. Drawing on a rich and novel dataset, the paper documents the cross-sector and cross-border linkages and considers which are the most relevant for systemic risk monitoring. From a macroprudential perspective, the identification of potential feedback and contagion channels arising from the linkages of banks and shadow banking entities is particularly challenging when shadow banking entities are domiciled in different jurisdictions. The analysis shows that many of the EU banks’ exposures are towards non-EU entities, particularly US-domiciled shadow banking entities. At the individual level, banks’ exposures are diversified although this diversification leads to high overlap across different types of shadow banking entities.

Highlights

The substantial growth of the shadow banking system in recent years has led to increased monitoring of this part of the financial sector.1 Given that ‘shadow banking entities’ can form part of complex financial intermediation chains which can include banks and insurance corporations (Pozsar et al 2013, Cetorelli 2014), understanding the nature of their linkages is important
As shadow banking entities are subject to varying degrees of supervision, there was a lack of transparency and comprehensive macroprudential risk monitoring of their linkages and activities
Given that a common source of vulnerability is represented by US-domiciled entities, this highlights the potential transmission channels stemming from the US shadow banking system which were exposed during the financial crisis (Maes, 2014)

Summary

Introduction

The substantial growth of the shadow banking system in recent years has led to increased monitoring of this part of the financial sector.1 Given that ‘shadow banking entities’ can form part of complex financial intermediation chains which can include banks and insurance corporations (Pozsar et al 2013, Cetorelli 2014), understanding the nature of their linkages is important. Such diversification leads to a high degree of overlap among banks’ exposures to different types of shadow banking entities. This section concludes with an analysis of the concentration and overlap of EU banks’ exposures to shadow banking entities.

Results

Conclusion