Misc

Question 1

Despite their differences, FIs generally do at least one:

Answer 1

1. Pooling resources of small savers
2. Safekeepng & accounting services, payment systems
3. Providing liquidity by converting balance into means of payment
4. Providing ways to diversify risks
5. Reducing information costs

Question 1

What do NBFIs have in common?

Answer 1

Market-based funding (as opposed to deposit-based)

Question 2

Why do NBFIs pose less risk to the financial system than banks (in theory)?

Answer 2

Do not perform maturity / risk / asset transformation

Question 3

What have the GFC & pandemic revealed about NBFIs?

Answer 3

They can amplify shocks, both directly & through linkages to other parts of financial system

Question 4

Which has grown faster over the past decade – banks or NBFIs?

Answer 4

NBFIs

Question 5

What % of the global financial system was NBFI AUM in 2008?

Answer 5

42%

Question 6

What % of the global financial system was NBFI AUM in 2019?

Answer 6

49.5%

Question 7

What does OFI stand for?

Answer 7

Other financial intermediaries

Question 8

What are OFIs?

Answer 8

1. Investment funds
2. Captive financial institutions
3. CCPs
4. Broker-dealers
5. Finance companies
6. Trust companies
7. Structured finance vehicles

Question 9

What does CCP stand for?

Answer 9

Central counterparty

Question 10

Where have NBFIs grown the fastest?

Answer 10

Emerging market economies

Question 11

What are shadow banking entities?

Answer 11

A sub-sector of NBFIs with specific characteristics

Question 12

What is the FSB’s definition of shadow banking?

Answer 12

Credit intermediation involving entities and activities fully or partially outside the regular banking system

Question 13

What does FSB stand for?

Answer 13

Financial Stability Board

Question 14

What factors increase systemic risk of shadow banking?

Answer 14

• Bank-like functions (transformation, leverage)
• Interconnectedness with regular banking

Question 15

What is the trajectory of shadow banking to date?

Answer 15

• Dramatic growth in 00s
• Collapsed in GFC
• Grew to 28% of NBFI by 2019

Question 16

How does shadow banking work?

Answer 16

• Securitisation-based credit intermediation
• Transformation across multiple balance sheets instead of one

Question 17

What is securitisation?

Answer 17

Lenders sell loans, repackaged as ABSs, to other banks/investors

Question 18

What are the steps of shadow banking?

Answer 18

1. Banks/NBFIs/others originate loans
2. Loan warehousing funded by ABCP
3. Broker-dealers pool & structure loans into ABS/CDOs
4. ABS warehousing funded by repos

Question 19

What is ABCP?

Answer 19

Asset-backed commercial paper

Question 20

What transformation does shadow banking perform?

Answer 20

Risky long-term loans -> apparently credit risk-free, short-term, money-like instruments

Question 21

How is shadow banking funded?

Answer 21

Wholesale money market

Question 22

What is the role of banks in shadow banking?

Answer 22

Originate loans, then transfer them to shadow banks

Question 23

Why do shadow banks need banks?

Answer 23

Liquidity & credit support to get high credit ratings to buy money market instruments

Question 24

What problems did the GFC reveal in shadow banking?

Answer 24

1. Lower lending standards/unregulated loan origination
2. Increasing leverage & maturity mismatch
3. Exposed to runs

Question 25

What is an advantage of shadow banking?

Answer 25

Funds for real economy including SMEs

Question 26

What are the most important risks monitored by bank shareholders?

Answer 26

• Credit risk
• Liquidity risk

Question 27

What are the main limitations of the credit multiplier model?

Answer 27

1. Required reserves
2. Capital adequacy
3. Borrowers’ creditworthiness
4. High interest rates