Chapter 1 - What Is Shadow Banking?
This treatise draws on a number of current researchers on the shadow banking sector, i acknowledge their influences on my thinking and thank them, Melanie Fien, Zoltan Pozsar, Adrian Ashcraft
The term “shadow banking” is one that is used by banking regulators, the media and academics especially when coming up with explanations for the financial crisis of 2007-2008. It has become a rallying point for international reform efforts aimed at the unregulated nonbank financial activities which have potential to destabilize the global financial system1.However on closer examination it is apparent that not only does shadow banking subsist predominantly within the regulated banking system2, it also in another form is expected to remain an integral part of the financial ecosystem in days to come3.This treatise disputes the labeling of shadow banks and will endeavor to show that the shadow banking system can be viewed as one that is parallel to the traditional banking model as opposed to being a substitute. Therefore this improper characterization of this very important sector is largely flawed and a proper unbiased view will result in regulators ability to propose a rational framework for a financial system which will not fall apart again.
This begs the very important question, what exactly is shadow banking?. It first originated from remarks by economist Paul McCulley as a description of a large segment of financial intermediation that is routed outside the balance sheets of regulated commercial banks and similar depository institutions. This routing of the information outside the balance sheets is the key reason why financial regulators and economists have so named this industry. The spotlight on Sh...
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...excuse to sidestep culpability for the crisis and therefore created a false narrative which has not presented a concrete foundation for the construction of a resilient financial framework going forward. This is especially as these statements are in truth at odds with the facts of the matter and suggest that regulators still do not understand the events that led to the financial crisis.
Shadow banks are at the center of the global market- based financial intermediation system, conducting maturity, liquidity, and credit transformation without explicit public sector guarantees or liquidity access18. A commonly overlooked fact is that a majority of non bank financial intermediation predate the financial crisis by decades and leading off of that, many of the largest shadow banking institutions are established ones with close knit ties to the traditional banking system.
Foner, Eric., Garraty, John A (eds) “Banking” The Reader’s Companion to American History, Houghton Mifflin: New York, 1991., pg. 191
In October of 1929, the American economy took a huge hit from the stock market crash. Since so much people had invested their money and time in the banks, when the banks closed many had lost all of their money and were in the deep poverty. Because of this, one of my first actions of the New Deal was the Federal Deposit Insurance Corporation (FDIC). Every bank in the United States had to abide by this rule. This banking program I launched not only ensured the safety and protection of deposits made my users of banks, but had also restored America’s faith in banks, causing people to once again use banks which contributed in enriching the economy. Another legislation I was determined to get passed...
Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas". The 2007 financial crisis was composed of the fall of many major financial institutions, an unknown increase in mortgage loan defaults, and the derived freezing up of credit availability (Brue). It was the result from risky mortgage loans and falling estate values (Brue) . Additionally, the financial crisis of 2007 was the result of underestimation of risk by faulty insurance securities made to protect holders of mortgage-back securities from risk of default and holders of mortgage-backed securities (Brue). Even to present day, America stills suffers from the aftermaths of the financial crisis.
Two individual employees wanted to complete their assignment for their company. But, did their strategy go about accuracy? Karel Svoboda works for Rogue Bank. Svoboda is a credit officer who needed Alena Robles, independent accountant, assists to evaluate and approved his employer’s extensions of credit to clients. In order to complete the task, Svoboda needed to access the nonpublic information about the clients’ personal information related to the company such as their profits and performances. Instead of appropriately following the company policy, Svoboda and Robles created a plan to utilize this data to exchange securities. According to their plan, Robles exchanged the securities of more than twenty unique organizations and benefitted by
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
With the floodgates open, it would be impractical and unsafe to deal with millions of dollars in cash. Under these circumstances, the implementation of a new and separate banking system is necessary, as the existing global financial institution will not be willing to go against international money laundering laws.
Not all heroes wear capes. The industrial revolution, during the eighteenth and nineteenth century, gave birth to numerous factories throughout the United States. With the technological innovations of efficient tools, heavy machinery, and other devices used to mass produce, this period in time required less human and animal power to complete troublesome tasks. Incidentally, the government did not lead this great time in history, the Laissez Policy did not allow them to. The leaders of this industrial revolution were people such as Andrew Carnegie, John D. Rockefeller, Philip Armour, Leland Stanford, and a few more. Due to some of these leaders, people coined the term “Robber Barons,” because they were able to create unfair competition and economically manipulate the price of their product when they formed trusts or monopolies. However,
In conclusion, The years 2008 shined a light on a group of people who were considered high society. When the stock market crashed in September 2008, the world shines a spotlight on the financial corporation. The world now knows what words such as hedge fund manager and financial instrument such as credit default swaps mean today. The economic downturn forced society to ask questions not normally asked and now pay closer attention to white collar crimes.
A Ponzi scheme is an investment fraud that involves the payment of returns to previous investors from funds paid by new investors.With little or no legal earnings, Ponzi schemes require a consistent flow of money from new investors to operate. Ponzi schemes tend to collapse when the operator is unable to recruit new investors ,when a large number of investors ask to cash out or if the operator disappears.These types of financial fraud have had a tremendous affect on the accounting profession, in the form of forensic accounting.
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
The bank failure in Jamaica illustrates how negative mindsets and behaviors can devastate the financial system and disrupt economic growth. The primary role of any bank is to safeguard its customer’s money, offer interest rate on deposits, lend money to creditworthy individuals, and make sound investment decisions to maximize shareholder value. Because of rapid economic growth between the late 1980s and early 1990s in Jamaica, the Central National Bank (CNB) and Worker’s Savings and Loans Bank (WSLB) loosened their monetary policies, provided preferential interest rates and extended credit beyond what was reasonable to members of its own board of directors, managing directors, and officers of the bank. These actions posed significant risks to the bank and its future.
Offshore banking is the action of having a bank account outside of the country of residence. Since its start, offshore banking has become a considerably lucrative business. Many of those who take part in offshore banking are looking for a secure location to place their income or seize the opportunity of having lower taxes. However, there are those who misuse the privilege of a foreign bank and use the business ventures for illegal actions rather than the original purpose of the dealings. Offshore banks seem to have an impartial acceptance of quite a few clients within the bank that create a lower standard of ethics in contrast to the ethics meant to be held—this includes those of a political position. Furthermore, this has the potential to be detrimental to the economy.
Steverman,B. and Bogoslaw, D. (2008) ‘The financial crisis blame game’, Business week, October [Online]. Available at: http://www.businessweek.com/investor/content/oct2008/pi20081017_950382.htm?chan=top+news_top+news+index+-+temp_top+story (Accessed: 1st August 2010).
The first online banking system was created in 1980 in New York, and was adopted by four main banks; Citibank, Chemical, Manufacturers Hanover and Chase Manhattan. The sector needed an innovation in banking systems because of growing consumer demand for service improvements as well as fear of losing market share. In the beginning, online banking was treated at private customers and small companies, to help customers have easier access to their bank accounts, however, now it achieves a global reach through the population. (Cronin 1997) In today’s world, electronic business (E-business) is very important especially for the banking system, plays a fundamental role in online banking (Nasri 2011). A true definition of online banking is difficult, because this system is connecting with different services which are constantly evolving. Access to online banking is possible through the internet, phone or even television. (Daniel, 1999; Mols, 1998). This ‘open system’ is available to the customers twenty four hours a day, seven days a week. This is a multi-level organized system, which helps people pay bills, check credit cards or even arrange mortgages without leave their houses. (Singer 2012)