{"id":34980,"date":"2018-06-11T05:57:58","date_gmt":"2018-06-11T10:57:58","guid":{"rendered":"http:\/\/olduvai.ca\/?p=34980"},"modified":"2018-06-11T05:57:58","modified_gmt":"2018-06-11T10:57:58","slug":"the-role-of-shadow-banking-in-the-business-cycle","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=34980","title":{"rendered":"The Role of Shadow Banking in the Business Cycle"},"content":{"rendered":"
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THE ROLE OF SHADOW BANKING IN THE BUSINESS CYCLE<\/a><\/h3>\n<\/div>\n<\/header>\n
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1<\/a>The process of lending and the uninterrupted flow of credit to the real economy no longer rely only on banks, but on a process that spans a network of banks, broker-dealers, asset managers, and shadow banks funded through wholesale funding and capital markets globally. \u2013 Pozsaret et al., 2013, p. 10<\/p><\/blockquote>\n

I. Introduction<\/h4>\n

According to the standard version of the Austrian business cycle theory (e.g., Mises, 1949), the business cycle is caused by credit expansion conducted by commercial banks operating on the basis of fractional reserve.2<\/a>Although true, this view may be too narrow or outdated, because other financial institutions can also expand credit.3<\/a><\/p>\n

First, commercial banks are not the only type of depository institutions. This category includes, in the United States, savings banks, thrift institutions, and credit unions, which also keep fractional reserves and conduct credit expansion (Feinman, 1993, p. 570).4<\/a><\/p>\n

Second, some financial institutions offer instruments that mask their nature as demand deposits (Huerta de Soto, 2006, pp. 155\u2013165 and 584\u2013600). The best example may be money market funds.5<\/a>\u00a0These were created as a substitute for bank accounts, because Regulation Q prohibited banks from paying interest on demand deposits (Pozsar, 2011, p. 18 n22). Importantly, money market funds commit to maintaining a stable net asset value of their shares that are redeemable at will. This is why money market funds resemble banks in mutual-fund clothing (Tucker, 2012, p. 4), and, in consequence, they face the same maturity mismatching as do banks, which can also entail runs.6<\/a><\/p>\n

Many economists point out that repurchase agreements (repos) also resemble demand deposits. They are short term and can be withdrawn at any time, like demand deposits. According to Gorton and Metrick (2009), the financial crisis of 2007\u20132008 was in essence a banking panic in the repo market (\u2018run on repo\u2019).<\/p>\n

\u2026click on the above link to read the rest of the article\u2026<\/p>\n

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THE ROLE OF SHADOW BANKING IN THE BUSINESS CYCLE 1The process of lending and the uninterrupted flow of credit to the real economy no longer rely only on banks, but on a process that spans a network of banks, broker-dealers, asset managers, and shadow banks funded through wholesale funding and capital markets globally. \u2013 Pozsaret […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[20463,61,98,7418,7380,175,6876],"class_list":["post-34980","post","type-post","status-publish","format-standard","hentry","category-economics","tag-arkadiusz-sieron","tag-banking","tag-business-cycle","tag-capital-markets","tag-cobden-centre","tag-credit","tag-shadow-banking"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/34980","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=34980"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/34980\/revisions"}],"predecessor-version":[{"id":34981,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/34980\/revisions\/34981"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=34980"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=34980"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=34980"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}