Shadow Banking Around the Globe

Abstract

This is the first chapter of the section exploring shadow banking around the world. In this chapter, Nijs starts from the two drivers of shadow banking, that is, regulatory arbitrage and effective demand. Pondering about the risk of private safe asset creation, he wonders what made the 2007–2009 crisis so different and worse than the tech stock crisis in 2002–2003. While reviewing the relevant literature, he concludes that the information insensitivity of debt markets, and thus the shadow banking industry, was the key differentiator. When the fixed liability nature of debt markets is confronted with questions about valuation and quality, the debt market becomes information-sensitive and creates an unstoppable avalanche of contagion throughout markets. The next question then becomes what specific risks the shadow banking industry adds to the general risks embedded in debt markets and what it means for the properties regulation need to have to mitigate those risks. From there onward, he analyzes the structure of shadow banking industries around the world, compares them and assesses their dynamics. While doing so he also pays attention to the relationship between shadow banking and (offshore) financial centers and their role in tax avoidance/evasion.