Abstract
This chapter chiefly concerns the analysis of the shadow credit intermediation process, but the main purpose remains dealing with difficulties of the credit transformations, in order to understand the allocation of risks and benefits among the shadow banking entities.
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Notes
See Fabozzi and Kothari (2007) “Securitization: The Tool of Financial Transformation,” Yale ICF Working Paper, no. 07-07, cit., where the authors explain how the combination of securitization techniques with credit derivatives and risk transfer devices creates innovative methods of transforming risk into commodities, allowing market participants to operate into sectors which were otherwise not open to them.
See Tucker (2012) Shadow Banking — Thoughts for a Possible Policy Agenda, cit., p. 3.
See Adrian and Ashcraft (2012) “Shadow Banking Regulation,” FRB of New York Staff Report, no. 559, cit., where they confirm how shadow banks contributed to the credit boom in the early 2000s and then collapsed during the recent financial crisis of 2007–2009.
See Pozsar, Adrian, Ashcraft, and Boesky (2012) Federal Reserve Bank of New York Staff Reports — Shadow Banking, cit., p. 10.
see, once more, Pozsar, Adrian, Ashcraft, and Boesky (2012) Federal Reserve Bank of New York Staff Reports — Shadow Banking, cit., p. 10, where it is assumed that “in the shadow banking system, loans, leases, and mortgages are securitized and thus become tradable instruments. Funding is also in the form of tradable instruments, such as commercial paper and repo. Savers hold money market balances, instead of deposits with banks.”
See the case shown by Tucker (2012) Shadow Banking: Thoughts for a Possible Policy Agenda, cit., p. 3.
In other words, according to Tucker (2012) Shadow Banking: Thoughts for a Possible Policy Agenda, cit., p. 3: “That is, banks should hold more liquid assets against such exposures.”
See Pozsar, Adrian, Ashcraft, and Boesky (2012) Federal Reserve Bank of New York Staff Reports — Shadow Banking, cit, p. 4, where it is stated that, “for example, a pool of illiquid whole loans might trade at a lower price than a liquid rated security secured by the same loan pool, as certification by a credible rating agency would reduce information asymmetries between borrowers and savers.”
See Capriglione (2010) Introduzione, in Urbani (ed.) L’attività delle banche (Padova), p. 1.
See Bank of England and ECB, The Case for a Better Functioning Securitization Market in the European Union, May 2014, pp. 13–14.
See Albertazzi, Eramo, Gambacorta, and Salleo (2011) “Securitization is not that Evil After All,” Bank of Italy Working Papers, February 2011, p. 3.
See Merusi (2009) “Per un divieto di cartolarizzazione del rischio di credito,” Banca borsa e titoli di credito, I, p. 253 ff.
see Kolm (2014) “Securitization, Shadow Banking, and Bank Regulation,” SSRN Working Paper, no. 2521390.
See Adrian and Shin (2009) “The Shadow Banking System: Implications for Financial Regulation,” FRB of New York Staff Report, no. 382,where it was anticipated that in the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.
See Gorton and Metrick (2010) “Securitized Banking and the Run on Repo,” Yale ICF Working Paper, no. 09-14, where the authors find that changes in the “LIB-OIS” spread, a proxy for counterparty risk, were strongly correlated with changes in credit spreads and repo rates for securitized bonds. They assume that these changes implied higher uncertainty about bank solvency and lower values for repo collateral. This raises concerns about the liquidity of markets for the bonds used as collateral led to increases in repo “haircuts”: the amount of collateral required for any given transaction. They conclude that, because the declining asset values and increasing haircuts, the US banking system was effectively insolvent for the first time since the Great Depression.
See Mazzuca and Agostino (2011) “Empirical Investigation Of Securitisation Drivers: The Case of Italian Banks,” The European Journal of Finance, Vol. 17, Issue. 8, p. 623 ff.
See Hansel and Krahnen (2007) “Does Credit Securitization Reduce Bank Risk? Evidence from the European CDO Market,” Working Paper, March 20, available at http://www.cepr.org, where the authors analyze whether the use of credit risk transfer instruments affects risk taking by large, international banks.
Furthermore, see Nijskens and Wagner (2011) “Credit Risk Transfer Activities and Systemic Risk: How Banks became Less Risky Individually but Posed Greater Risks to the Financial System at the Same Time,” Journal of Banking & Finance, Vol. 35, Issue 6, p. 1391 ff.
See also Uhde, Farruggio, and Michalak (2012) “Wealth Effects of Credit Risk Securitization in European Banking,” Journal of Business Finance & Accounting, Vol. 39, where—using a unique cross-sectional dataset of 381 cash and synthetic securitizations issued by 53 banks from the EU-15 plus Switzerland between 1997 and 2007—these authors provide an empirical analysis of the time-dependent negative wealth effects of credit risk securitization announcements in European banking.
See Battaglia and Mazzuca (2012) “La relazione tra attività di cartolarizzazione e liquidità nelle banche italiane. Alcune evidenze empiriche dalla recente crisi finanziaria—Securitization and liquidity in Italian banks. Evidence from the recent financial crisis,” Banca Impresa Società, p. 419 ff.
On the juridical relevance of the gentlemen’s agreements, see Di Donna (2013) Gentlemen’s Agreements. Notazioni sulla fenomenologia degli accordi, (Napoli) p. 12 ff.
See Picardi (2008) “Il ‘Fondo comune di crediti’ nel sistema della separazione patrimoniale,” Banca borsa e titoli di credito, I, p. 76 ff.
See Rucellai (2012) “Cartolarizzazione sintetica e Credit Default Swap,” Giurisprudenza commerciale, n. 3, p. 1, p. 371 ss.
see Claessens, Pozsar, Ratnovski, and Singh (2012) Shadow Banking: Economics and Policy, cit., p. 22.
See Cossu-Spada (2010), “Dalla ricchezza assente alla ricchezza inesistente— divagazioni del giurista sul mercato finanziario,” Banca borsa e titoli di credito, I, p. 401 ff.
See Verde (2014) “Cartolarizzazione, patrimonio separato e limiti alle garanzie per gli investitori—Securitization, Separate Assets and Limits to the Guarantees for the Investors,” Rassegna di diritto civile, p. 485 ff.
See Ammannati (2012) “Mercati finanziari, società di rating, autorità ed organismi di certificazione,” Rivista di Diritto Alimentare, 2012, f. 1, p. 17 ff., where the author clarifies that experience of the financial markets shows how the economic operators are not always structured on the rational assessment of information received, and then she specifies that the rating, as expressed in an alphabetical and easily intelligible mark, has partially changed its value in the market and is aimed at spreading systemic trust based on the CRAs’ reputations.
See Partnoy (2006) “How and Why Credit Rating Agencies are Not Like Other Gatekeepers. Financial gatekeepers: can they protect investors?,” San Diego Legal Studies Paper, no. 07-46, where the author describes how CRAs have changed radically since 1999, becoming more profitable than other gatekeepers and facing different and more important conflicts of interest. The author also highlights how CRAs are uniquely active in structured finance and particularly on collateralized debt obligations.
See Troisi (2013) Le Agenzie di rating (Padova), p. 152
see also Giudici (2011) “L’agenzia di rating danneggia l’emittente con i propri rating eccessivamente favorevoli?,” Le Società, f. 12, p. 1451 ff.
See Troisi (2014) “Rating e affidamento dell’investitore: profili di responsabilità dell’agenzia,” Rivista Trimestrale di Diritto dell’economia, II, p. 166 ff., where the author comments the decision of the Federal Court of Australia, ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 related to this topic.
See Lener and Rescigno (2012) “Agenzie di “rating” e conflitti di interesse: sintomi e cure i,” Analisi Giuridica dell’Economia, f. 2, p. 353 ff.
See Troisi (2013) Le Agenzie di rating, cit., p. 151 ss.
On this point, see also Principe (2014) “Presentazione,” in Principe (ed.) Le Agenzie di Rating (Milano), p. VII ff., where the author explains the need to clarify the different issues relate to the rating assessments.
See Coval, Jurek, and Stafford (2009) “Economic Catastrophe Bonds”, The American Economic Review, Vol. 99, Issue 3, p. 628 ff.,
where the authors confirm some of the ideas shown in Coval, Jurek, and Stafford (2009) “The Economics of Structured Finance”, The Journal of Economic Perspectives, Vol. 23, Issue 1, p. 3 ff.
and Masera (2012) “CRAs: Problems and Perspectives,” Analisi giuridica dell’economia, no. 2, p. 425 ff.
See also Rablen (2013) “Divergence in Credit Ratings”, Finance Research Letters, Vol.10, Issue 1, p. 12 ff.,
See Bolton, Freixas, and Shapiro (2012) “The Credit Ratings Game”, Journal of Finance, Vol. 67, Issue 1, p. 85 ff.
See Malmendier and Shanthikumar (2007) “Are Small Investors Naïve About Incentives?”, Working Paper of the Department of Economics Harvard Business School, UC Berkeley Harvard University, where the authors analyze how investors account for such distortions. Using the NYSE Trades and Quotations database, they found that small traders follow recommendations literally, and then present evidence on the returns of these strategies and discuss possible explanations for the differences in trading response, including informational costs and investor naiveté.
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© 2016 Valerio Lemma
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Lemma, V. (2016). Shadow Banking Operations. In: The Shadow Banking System. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/9781137496133_6
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