The following Financial Services guidance note provides comprehensive and up to date legal information covering:
The shadow banking system is a form of credit intermediation involving entities and activities outside the regular banking system. Non-bank credit intermediation is a necessary source of funding for economic activity but this sector has real capacity to affect financial stability. Securities financing transactions assist with price discovery, secondary market liquidity, market-making, investment and risk management strategies as well as leverage and maturity and liquidity transformation. Risks are created at an entity level and form part of a complex chain of transactions causing a number of contagion routes into the regular banking system.
As well as the potential for 'runs', the sector experiences procyclicality. This is demonstrated by accelerating credit supply and asset price increases when confidence is high, with plunging falls in supply and prices linked to sudden loss of confidence. In 2007-09, markets experienced the failure of asset-backed commercial paper (ABCP) markets, the breakdown of originate-to-distribute models using structured investment vehicles (SIVs) and conduits, runs on money market funds and sudden revision of terms for securities lending and repurchase (repo) agreements. The shadow banking system has not been subject to the same sort of prudential regulation and oversight safeguarding which has developed in the mainstream banking system.
This is why the international community has been working to extend the regulatory perimeter to cover
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