Effects Of Shadow Banking On The Financial Crisis

In this essay I am going to discuss the effects of shadow banking on the recent financial crisis of 2007-8. Shadow banking was one of the major causes of the financial crisis since it was the subprime mortgages which was the first trigger of the collapse in the banking system. Through this essay I am to achieve a detailed analysis of why the shadow banking was one of the causes in the financial crisis and why was it not prevented by any regulation enforced. The basis of shadow banking system is that it occurs when financial intermediaries conduct transformation of maturity, credit and liquidity without having access to the central bank liquidity guarantees or even public sector credit. Maturity transformation: obtaining short-term funds to†¦show more content†¦This is in contrast to the traditional banking system of originate to hold model. In the shadow banking system there is an highly important part in the process which is the securitisation process. The securitisation process is a method where illiquid assets are transformed into liquid tradable instruments. In more detail the securitisation process is a method which gives the banks the opportunity to removes the loans from the asset side of their balance sheet meaning that they evenly spread the associated risks to the other financial units. This could be due to the fact that shadow banks are largely unregulated. However during the financial crisis the shadow banking system also helped magnify the risks in the banks balance sheets since after the financial crisis there was an increase in the regulation in the shadowing banking system. The complex process of securitisation has five stages to show the basic structure. The first step of the process starts with the commercial banks. The commercial banks are the originators of the loan since they decide to securities a part of their loans. The following step is the aggregator buys loans from one or more originators which then means that the aggregator can sell the loans to a multiple amount of buyers. The third step is when the loans that have been sold to many buyers are sold off to the