Monday, 1 July 2013

Shadow Banking: Australian and International Experience Around Times of Financial Stress and Regulatory Reform

Carl Schwartz

In many countries the financial crisis has generated large shifts in financing from the ‘shadow banking system’ to the ‘regular banking system’. It has also brought about a wave of financial regulatory reforms that some contend could push financing activity back into the shadows. This paper provides some historical context for considering potential future developments by examining how the share of ‘shadow bank’-based financing has evolved in Australia and a number of other countries. A particular focus is developments around the recent crisis, and, for Australia, around the late 1980s/early 1990s period of financial upheaval and regulatory reform. Australia’s past experience suggests that the financial crisis-related shock to risk attitudes and regulatory clampdown will be considerable headwinds for aggregate shadow banking sector activity. Nonetheless, regulators should remain focused on fast growing components and their linkages to other parts of the financial system.