The economics of shadow banking: a theoretical approach to the securitized credit intermediation process

During the last four decades we witnessed to fundamental changes in financial techniques and financial regulation that paved the way for the development of innovative financial instruments and the establishment of non-bank financial entities. This wave of financial innovation allowed non-bank financial institutions to compete with traditional banks in performing bank-like activities at low costs and in offering a broad range of high-yield investment opportunities. Such changes have gradually transformed the “originate-to-hold" banking model into a “originate-to-distribute" model based on a securitized credit intermediation process that relies upon: securitization techniques; securities financing transactions; mutual funds industry. The securitized credit intermediation process is the backbone of the modern forms of non-bank financial intermediation that “...take(s) place in an environment where prudential regulatory standards and supervisory oversight are either not applied or are applied to a materially lesser or different degree than is the case for regular banks engaged in similar activities" (Financial Stability Board) simply known as the shadow banking system. The purpose of our work is to analyze the economics of the shadow banking system by investigating the components, mechanisms and techniques of the underlying securitized credit intermediation process and examining how they are embedded within the current supervisory and regulatory framework. In particular, we focus the attention on the role of securitization both as the main intermediation activity and as a crucial source of collateral used, mostly through repurchase agreements, to raise funds in the wholesale money markets.