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TOPIC: Shadow Banking and Credit Creation

Shadow Banking and Credit Creation 10 months 22 hours ago #1

  • stulem
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One issue that I do not fully understand relates to shadow banks and their ability to create credit like regular commercial banks through fractional reserve lending. Presumably a shadow bank entity first borrows funds from a regular commercial bank or sells debt instruments or equity to investors. Once it get its initial funding can the shadow bank entity then create loans to third parties like regular commercial banks by creating (out of thin air) a loan asset on its balance sheet and, on the liability side of its balance sheet, an bank deposit (of real money) to the borrower without any regulatory oversight as to capital and reserve requirement since by definition it is outside the regulatory regime. Alternately, can a shadow bank only lend $ for $ the money it collects from investors. The answer to this question has always baffled me and the answer will have a big impact on credit creation in the financial system. For example how do the shadow bank entities in China create credit. In fact what entities qualify as shadow bank entities and why? What are the necessary criteria of a shadow banking entity? Maybe get an expert to discuss this in a podcast. Thanks very much. Stuart L.
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