INTERCONNECTEDNESS BETWEEN SHADOW AND TRADITIONAL BANKING SYSTEMS IN EUROPE

Original scientific paper
Autor: Svetlana Popović, Irena Janković, Velimir Lukić
JEL: G21, G23, G32
doi: 10.5937/bankarstvo1703014P
SCINDEX

Summary: The financial crisis that emerged in the US quickly spread across Europe, causing a severe banking and sovereign debt crisis. That revealed the importance of short-term financing for traditional banks, which increased their exposure to the financial conditions on the interbank market. Financial innovations, especially the securitization process led to the growing importance of different institutions within the shadow banking system - which undergo a credit, liquidity and maturity transformation, without accessing the central bank liquidity or other forms of guarantees. The European banks had an active role in the US securitization process, but also securitized the products from the European market. The authors used the available data from the ECB statistics on shadow bank entities, broadly and narrowly defined, in order to analyze the various measures of interconnectedness between the shadow and traditional banking systems. The analysis showed that non-regulated financial institutions pose severe systemic risks, not just because of their size, but also due to the strong web of interconnectedness with the regulated banking sector.

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