The Chinese shadow banking system has been widely followed: on the contrary, its major competitor, the Indian one, is not so well researched. The study examines the main characteristics of shadow banking and the current issues of the Indian shadow banking system. In the research the author enhances the definition of the shadow banking activities and actors which are more specific actors and activities in the Indian shadow banking. As part of this broadening of the definition the unregulated lending activities also included into the shadow banking activities.
The recognition of shadow banking systems, despite having been in the financial system for hundreds of years, only took place after the 2007-2009 crisis. Indeed, it is by no means easy to identify this form of financial intermediation system, which is extremely complex and differs almost from country to country, appearing in its entirety and emerging as a hiding place.
India, which has a dynamic development like the one of China, has only become the focus of attention in recent years, because of the downfall of a shadow banking financial player, in terms of shadow banking system risks.
This study is therefore to examine the operation of the shadow banking system in India and the expansion of the definition and temporal scope of shadow banking system operation. The author broadened the definition defined by the FSB in that the concept of shadow banking, which should be extended to include securitization and unregulated credit activities which are relevant part of Indian shadow banking system.
After the broadening of the definition of the shadow banking system and a brief analysis of the operation it, the author outlines the reasons for the formation, key players, and development trend of the Indian shadow banking system.
The mechanism of the shadow banking system, which culminated in the 2007-2009 global financial crisis, was first identified by Paul McCulley at an Economic Policy Symposium held in 2007 by the Federal Reserve of Kansas City in Jackson Hole, Wyoming, USA. According to Mcculley, there were signs of significant instability in the world economy as early as 2007, a key component of which was the rise of the shadow banking system during the boom of the 2000s. This instability rose to a level by 2007 that, in Mcculley’s words, even then, it was expected that even a Minsky moment could occur soon, with confidence in the financial system faltering and lending drastically declining, which could eventually lead to a deep recession. McCulley was right, a drastic drop in lending and a deep recession could not be avoided. Only the Fed was able to prevent the collapse of the financial system by appearing for the first time in history as the lender of last resort in protecting shadow banking players.
Before defining the shadow banking system, it is worth noting that as early as the 1990s, the reason for the collapse of the BCCI banking group was the emergence of almost “perfect” regulatory arbitrage. And regulatory arbitrage is one of the manifestations of shadow banking, as we will see later. In 2003, the starting point for a joint analysis by the Basel Committee on Banking Supervision and the Bank for International Settlements (BIS) was the BCCI scandal, in which the authors drew attention to the supervisory challenges of a parallel banking system, an early definition of the shadow banking system. Then another question arises: if some actors of the shadow banking system were already operating before the global financial crisis of 2007-2009, and this can be treated as a fact based on the above-mentioned example, then their operation and the earlier appearance of these forms of operation in economic history can be considered shadow banking. If the answer to this question is only even partially, but positive, then even hundreds of years ago, forms of shadow banking system operation in the financial system can be identified in the case of corporate scandals caused by shadow banking activities fraudulent like security issuance.
Surprisingly for today’s observer, in the case of this type of financial institution, it was then proposed to be banned because of its activity according to the research. The analysis reviews financial institutions with a parallel ownership structure used by BCCI, for which a “parent financial institution” authorized in different states including businesses with the same ownership background and ultimate beneficiary staff, but which are no longer subject to banking supervision. The purpose of setting up the network can be multifaceted: in addition to sharing risks, creating a more favorable tax environment, and avoiding consolidated supervision of consolidated operations. However, this structure may result in non-transparent cross-financing within the group and the emergence of significant, even macro-level risks at the group level, so that the relevant supervisory authorities do not yet have adequate information on its occurrence and extent.
Definition and supervisory challenges of the shadow banking system according to the FSB
An appropriate definition therefore requires a delineation of the risks that could jeopardize the security of the financial system as a whole. A good starting point for this is the application of the guidelines for the regulation of the shadow banking system defined by the FSB. This first distinction was first made in full by the FSB in 2012. At that time, the FSB dealt with the shadow banking system according to a threefold system. First by defining the shadow banking system itself, and then with the scope of possible supervisory monitoring of the shadow banking system, and last but not least with the supervisory interventions that are possible and necessary to reduce systemic risks.
In delimiting the shadow banking system, the FSB applied the system of criteria according to which, among the non-bank financial service providers, it considers those entities and activities that are part of the shadow banking system:
a) implement a credit transformation,
b) where maturity and liquidity transformation take place,
c) the credit risk is transferred and leveraged by the financial service provider in such a way as to create a significant macro-prudential risk.
According to the FSB, macroprudential risk involves several factors:
a) the development of a shadow banking panic, like the bank panic in the money market due to the drying up of liquidity,
b) increasing the pro-cyclicality of the financial system, which will deepen the financial crisis and strengthen the asset bubble,
c) an increase in liquidity risk in the financial system, because of regulatory arbitrage.
In the case of macro-level supervision, the FSB recommends determining the scope of study based on the movements of individual amounts of money between the elements of the shadow banking system and the aggregate balance sheet of the participants of the given shadow banking system. If the sectoral breakdown of each actor is of sufficient depth, then macro-level monitoring may indicate the need for intervention even earlier than individual micro-level data.
At the micro level, data is made up of data provided by different data providers. Regarding quantitative data collection, counterparty data on credit products, but also data from other sectors subject to market surveillance, such as insurers, are used for this purpose. In addition, the analysis of data within each industry group is also relevant. The biggest disadvantage of this micro-level data is the latency – both in data provision and processing. Quantitative data are complemented by on-the-spot inspections of supervised shadow bank players and qualitative data available during the analysis of data requested from individual shadow bank financial service providers, based on which risks, and trends can be assessed, and future trends can be inferred.
The possible range of supervisory interventions can be determined from the gaps and inconsistent data from each data set based on qualitative data collection. At the level of the national economy, the excessively short data sets of individual data providers and their inadequate depth make the work of supervision more difficult. At the international level, in many cases, the lack of comparability (different statistical classifications and different depth and quality of data collection) hampers the effectiveness of internationally coordinated intervention.
The extended definition of the shadow banking system
However, based on the above, the question arises: is the shadow banking system capable of generating money in the same way as the traditional banking system? The answer is a resounding yes, and one of the possibilities is securitization. Prior to the Great Financial Crisis, there were no capital requirements for investment banking, unlike commercial banks. Therefore, when structured instruments such as derivatives began to be issued in large quantities, they were free to place bets on any market instrument. In this way, they were able to raise funds more cheaply than commercial banks, where meeting capital requirements increased the cost of external funds. During the securitization, financial institutions gained unsecured income and, to put it simply, free-to-use money. That is, if money is generated in the form of derivatives issued on non-regulated markets, its effective cost is indeed close to zero. An excellent example of this is the investment bank of Lehman Brothers’ activities before the fall of 2008, in which the investment bank issued four thousand different securities through seventy-five SPEs and trusts without providing capital or any other hedge. Why can this low-cost money creation be dangerous to the financial system? On the one hand, because the market surveillance authority does not have the necessary and up-to-date information on the amount of money generated in this form in a non-transparent way.
On the other hand, the amount of money thus created can create an asset bubble and be the subject of further speculation. The latter could also significantly increase market volatility, as was the case between 2007 and 2009, due to its spill-over effects on the financial system and its typically high leverage. However, in the case of securitization, the maturity and liquidity transformation, as well as the transfer of credit risks, also takes place, and all this is done through leverage during synthetic securitization. With this, securitization can also be considered a shadow banking system activity.
The definition of the shadow banking system set out above, by way of example by the Financial Stability Board (FSB) therefore needs to be expanded, as follows.
Expanding the group of forms of financing:
It is necessary to make further difference between legal entities in the case of private equity funds and venture capital funds. In both alternative forms of investment, equity investment appears to be dominant, but debt-type bonds and loan schemes also play a key role in the two types of funds that move significant capital, the risk of which may be exacerbated by a lack of transparency or excessive media in the case of used by activist investors.
The definition of the shadow banking system defined by András Kecskés in 2016 is also worth expanding and rethinking. Namely, it is necessary to do this in two respects, according to the author, from a theoretical scientific and a practical capital market supervision side. The former helps the legislator to extend the legislation, and the latter provides guidance to the legislator on micro- and macro-prudential measures. From a scientific point of view, the shadow banking system includes those subjects and activities of the financial system which:
a) offers an alternative to the services of the traditional banking system
b) by combining savings and loans in a novel, typically securities, form
c) within the framework of the institutional system not previously or only partially regulated, taking advantage of the possibilities provided by regulatory arbitrage
d) during its operation, it may also be able to generate money, generate systemic risk and use leverage
e) thus, increasing the possibility of traditional bank panics and shadow banking system panics, which
f) may require a degree of monetary intervention that may undermine confidence in the financial system as a whole by overstretching monetary policy options (quantitative and qualitative easing and widespread use of last resort creditors).
In the case of the extended, revised definition, the latter points (c) and (f) need to be clarified. In the case of point (c), the activities affected by regulatory arbitrage also affect the gray areas of the economy. Different legal forms of lending, e.g., between pawn shops, microcredit, leasing and illicit usury lending, and prohibited activities, the ponzi scheme and its forms of MLM also meet the above shadow banking system characteristics, both maturity and liquidity transformation and the emergence of systemic risk can occur in the form of lending and leverage as well. With regard to point (f), the measures taken to mitigate the economic effects of the 2020 coronavirus epidemic show that monetary policy is pumping such amount of liquidity into the financial system such as shadow banking crisis management that, it cannot be reduced until the next crisis, especially in Japan, in the United States and the European Monetary Union.
If we look at the above expanded scope of activities and legal entities, securitization alone can expand the historical overview of the shadow banking system by centuries. An early example of securitization was the securitization of England’s sovereign debt between 1694 and 1720. In addition, the leveraged share purchase that played a significant role in the 1907 banking panic and the insolvency of discount houses described by Walter Bagehot in 1857 also meet at least two of the above shadow banking characteristics (maturity and liquidity transformation, credit risk transfer, and leverage). Thus, the operation of the shadow banking system span over time not only in the 21st century, but it can be expanded until the beginning of the 18th century as stated above. It is worth noting prior to the 19th century, the size of individual capital markets alone limited the emergence of macro-level risks and could therefore be seen as an isolated phenomenon.
In the practical definition, the presence of systemic risks needs to be emphasized. Within this, the range of financial service providers outside the traditional banking system is decisive, from which the circle can be narrowed down with organizations that do not implement lending or credit risk transfer. It is necessary to expand the scope of activities of the traditional banking system with its activities related to securities trading. Thus, supervisory law enforcement will continue to be simpler due to the diversity of entities and activities. However, by deploying data mining and machine learning methods, as well as implementing simultaneous market records, the efficiency of the activity can be significantly improved. Among the shadow banking system players, it is also important to list the financial products of modern financial markets that may pose a significant risk in terms of leverage, in particular the range of structured products such as swaps, cash swaps, interbank foreign exchange transactions and ETFs. ETNs that operate in a similar way relative eto ETF, but have different issuer risk, as well as products that allow physical and financial clearing for exchange-traded futures.
Shadow banking systems in developed and developing countries
There are two significant differences between the shadow banking system in emerging markets and the shadow banking system in countries with developed money and capital markets: one is that shadow banking in developing countries has a lower level of development in traditional banking and in parallel with it, there is a predominance of shadow banking activities. In the case of the European Union, which have a universal banking system and in the case of United States, the more complex, structured securities have played a more significant role in the shadow banking relative to ones of the developed countries.
The other characteristic difference is that less information is available on shadow banking systems in emerging markets, nor does it cover as long-term time series due to the shorter historical past as in developed countries. At the same time, it can be clearly stated that the ratio of the shadow banking system to the balance sheet total of the entire financial system did not exceed 45% for these groups of countries in any case (the latter being the share of the shadow banking system in China) in 2019. The value is lower for developed countries.
The difference is typically twofold compared to the shadow banking system in developed countries. On the one hand, in the case of developed countries, over-regulation of certain elements of the traditional banking system results in a kind of regulatory arbitrage – which leads to looser or less tightly regulated product development to meet financial needs -, in developing countries similar transformation solutions are within the shadow banking system. On the other hand, in developed countries, due to the larger money and capital market history and more detailed regulation, more complex, less transparent transformation processes develop in the shadow banking system, while in emerging markets the missing regulations are covered by emerging financial innovations in the shadow banking system.
The economic foundations of the Indian shadow banking system
The foundations of India’s shadow banking system date back well to the period before independence in 1947. Even then, there were local traders who were engaged in lending without a permit (bania), and there were separate money lenders within each caste without a license to do so. In addition to those who deal with lending separately for each caste (chetty, sahukar, podar, schroff), a wide range of mortgage lenders or goldsmiths also provided loans to their clients and members of their castes. The name non-banking financial company (NBFC) as a shadow banking system was introduced in 1950 when Sundaram Finance was founded in India.
The legal framework for the Indian shadow banking system was established by Chapter III B of the Reserved Bank of India Act, 1934, with the provisions of an amendment that came into force in 1963, which also allowed the operation of a non-bank financial company. NBFCs covered a wide range of activities, from housing and car financing companies to investment fund managers to insurance companies, and even credit unions (chit funds). The purpose of the legislature with the amendment of the law was that if a company collects funds in a public way, it could only carry out this activity in a regulated form. Although the law sought to regulate public fundraising companies, companies using only private funds also applied for and obtained permission from the Reserve Bank of India (RBI), which oversees the market. Therefore, it was possible that in September 2019, 9642 non-bank financial companies were subject to supervision. This is unfortunate because it takes resources away from the supervision of companies that do not actually fall within this scope, which can lead to a significant loss of supervisory effectiveness. It would be advisable for the supervisor to focus on shadow bank players above a certain loan portfolio, as Kothari suggests, placing the supervisory focus on companies with a loan portfolio of Rs 5 billion.
It would be advisable for the supervisor to focus on shadow bank players above a certain loan portfolio, as Kothari suggests, placing the supervisory focus on companies with a loan portfolio of Rs 5 billion. Until 2011, this rule was also extended to non-bank financial companies. This was in the form that when financial institutions lent to non-bank finance companies in high-priority sectors, if this loan was advanced to a shadow bank player it was considered a high-priority loan in the case of private or publicly owned financial institution.
The foundations of India’s shadow banking system, like those of the United States, have been broadened by the deregulation of financial markets. However, the International Monetary Fund’s 1991 restructuring program set both privatization and globalization as important goals for India in addition to liberalizing the financial system. The structural changes of the 1990s have shaped the structure of the Indian economy that still exists today. Non-bank financial service providers then became a legally accepted financial sector within the financial system. The regulated shadow banking system thus created, together with its entry into the legal sphere, developed significant links with the traditional commercial banking system. The commercial banking system has also undergone significant change, as the new economic policy sought to increase the strengthening of market competition by licensing private commercial banks. Changes in economic policy have changed not only the structure of the financial sector but also the demand for its products. Industrial development has led to a significant increase in the demand for credit by small and medium-sized enterprises, so that the financial needs of the rural population have not been able to be met by the commercial banking sector even before that changes. Thus, in addition to the former informal financial institutions and state-owned commercial banks, there has been an increase in demand for the services of regulated shadow banking system players, especially in the area of housing finance and car loans.
While low economic growth in the 1980s financed only industry, growth in money was in line with industrial growth. Since then, however, money supply in the Indian economy has outpaced the ever-increasing pace of economic growth, with lending rates remaining low. As the amount of money increased and with the proliferation of non-bank financial companies, more and more money could be placed at the disposal of the expanded range of financial service providers. By 2018, the share of non-bank financial companies in the credit market share of financial institutions, to the detriment of state-owned banks, increased to 15.9%, while the share of private financial institutions reached 29.8% in terms of the credit market.
The share of the shadow banking system in total lending activity is apparently not significant, but as will be seen later, the composition of loans is significantly higher, as small and medium-sized enterprises and lower-income groups with smaller financial reserves are over-represented in the shadow bank’s loan portfolio.
The other risk factor for the Indian shadow banking system is the significant share of commercial banks in securing the source of funding for the shadow banking system. In 2018, this value reached 26%, although it declined slightly after the 2018 Il & FS crisis. The other major source of funding – within the shadow banking system – are the investment funds, which accounted for 18% of the total financial resources of non-bank financial corporations in 2018.
It is important to look back to the early years of 1990s of investment funds, when in 1993, in addition to previously exclusively state-owned investment fund managers, it became possible for private equity fund managers to enter the market in India. In 20 years, between 1998 and 2018, the assets managed by investment funds increased from INR 67 billion, by 2018, to more than 300 times, to INR 21360 billion.
Finally, the commercial bond should be highlighted as a key financial instrument for the Indian shadow banking system.
The above composition of financiers is well illustrated by the fact that as of August 16, 2019, Dewan Housing Finance Corporation Ltd. (DHFL) had 270 billion rupees in commercial banks, 2.8 billion in commercial bonds and 62.5 billion in deposits. DHLF was unable to meet its interest payment obligation of Rs 15.7 billion on that day for unsecured bonds and commercial bonds. The largest form of financing was a non-convertible, unsecured bond with a portfolio of 414 billion rupees.
These above-mentioned securities (unsecured corporate bonds and commercial bonds) as short- and medium-term liabilities pose a double threat to the financial system. On the one hand, in the event of default, their impact immediately spreads to the traditional banking system, and in the absence of renewal of commercial bonds with a maximum maturity of 270 days, a loss of financing could lead to a further radical and rapid deterioration in liquidity.
The gravity of the situation is also well illustrated by the depth of the legislative and enforcement response to DHFL’s default event. In 2019, after the collapse of two major shadow banking players, significant changes took place in India in the regulation of the shadow banking system.
Addressing the 2019 shadow banking crisis in India and other necessary measures to address risks
The bankruptcy of IL&FS in September 2018, the insolvency of Reliance Home Finance in February 2019 and the subsequent sway in confidence in Dewan Housing Finance Limited in September 2019 (issuing of INR 30 billion commercial bonds by mutual funds below face value) significantly shook confidence in the Indian shadow banking system.
Although attempts have been made to change the regulation of shadow banking system participants after the 2008 mortgage crisis in a favorable direction, reducing macro-prudential risk, unfortunately the proposals of the Usha Thorat Committee have not been put into practice. Thus, a working committee chaired by the Vice President of the Reserve Bank of India in vain proposed in its August-2011-report the introduction of a liquidity ratio that would require NBFCs to cover cash and government securities in the event of a 30-day asset and liability adequacy test. In addition, already at this time, the Commission proposed an annual comprehensive audit and annual stress tests for NBFCs with assets more than INR 10 billion.
The liquidity crisis discussed above occurred in the case of IF&LS in 2018 because of the lack of the implementation of the proposals above. However, by 2019, the default events of the three major shadow banking system players have already resulted in a significant increase in the risk of the Indian shadow banking system. The first and most important regulatory decision is the transfer of supervision of housing finance companies from the National Housing Bank to the Central Bank of India. In this way, the central bank was able to take over the on-site control and supervision of a key segment of the shadow banking system with the same depth and expertise as it exercises with the other players in the shadow banking system. From the fall of 2019, it became possible for the RBI, as a supervisory body, to dismiss members of the management and board of directors of a financial institution under its supervision, if they did not perform their management duties with due diligence for depositors and creditors. The removal or banning of auditors also came under the authority of the RBI. In 2019, the central bank canceled the registration of 1,851 shadow bank participants because they were unable to meet the minimum capital injection obligation of INR 20 million, thus reducing the supervisory workload.
To ensure liquidity in the shadow banking sector, the RBI used an unusual solution. It has set up an incentive scheme for public banks to increase their credit exposures to shadow bank players. As part of this scheme, it increased the maximum exposure of public financial institutions from 15% to 20% of their Tier 1 capital to a shadow bank player. On July 5, 2019, Nirmala Sitharaman, India’s Minister of Finance, undertook a 10% state guarantee on high-quality shadow banking assets up to Rs 1 trillion. As part of the measures taken in August 2019, it created a credit structure in which shadow banks bear 20% of the credit risk at loans advanced by them, while state banks, as credit providers, bear 80% of the risk if the loans advanced to high-priority industries and sectors.
The introduction of mor flexible rules is partly understandable, so that supervisory or regulatory rigor does not cause shadow banking system participants to fail, but the too big to fail approach should not be applied either. Under this approach, individual market participants are confident that the central bank will rescue a major high-risk financial service provider for the sake of the financial stability in India, and if not so, as a last resort lender, but by encouraging the legislator to provide more room for survival to restore trust in the financial system. Macroprudential considerations as opposite to this approach would also require isolation from the traditional banking system, so that the liquidity crisis in the shadow banking system does not spread to members of the traditional banking system.
The liquidity status of shadow bank players was further exacerbated by the economic effects of the coronavirus epidemic. In March 2020, the Reserve Bank of India announced a 3-month payment moratorium on bank loans, however, it was not clear whether the moratorium applied to the NBFC sector. In May 2020, India’s largest credit institution, the State Bank of India, and state-owned Punjab National Bank extended the moratorium to the NBFC sector. However, the negative impact of the coronavirus epidemic is already being felt in the case of NBFCs, especially where the rate of cash repayments is high, as it is not possible to collect credit due to the lockdown of the economy.
The solution could be similar to what the Indian financial administration had already done for commercial banks in 2015 by examining the quality of outstanding loans during an on-site inspection, bringing to surface the actual stock of non-performing debtors and providing the clarity necessary to take the necessary action. However, in this case, the supervisory focus should concentrate on the most significant shadow banking entities in order to use its resources for supervision effectively. The multi-level supervisory system proposed by the RBI in January 2021 to market participants may provide a solution to this problem. According to the proposal, a four-tier shadow banking supervision system is needed for more effective supervision.
Another solution could be to set up a special-purpose development institute with a state role, which would undertake the financing of infrastructure and long-term profitable industrial investments and at the same time exclude their financing from the possible financing possibilities of the NBFCs. Both solutions, which complement each other in part, seek to answer the problem that a significant proportion of NBFCs are unable to raise little or no deposits, instead financing their lending activity with short- or medium-term funding from the money market. If confidence in the sector in the money market declines and as a result these resources become more expensive or unavailable, it can lead to insolvency. This occurred between March 2018 and September 2019, when the cost of financing NBFCs increased by 7.2 to 9.2% due to the insolvency of major players in the sector and a significant deterioration in the credit ratings of many players in the sector. The situation is further exacerbated by the fact that a significant part of their funding is provided by commercial banks, which in turn could lead to the spread of the liquidity crisis from the shadow banking system to the traditional banking system. Therefore, if clairvoyance in the shadow banking system can be realized, it can increase confidence in the sector, and excluding the financing of projects with the longest return from the lending competence of the shadow banking system can reduce the risk of lending from short-term funding.
In the case of the Indian shadow banking system, it is expedient to examine the features of the traditional Indian banking system and its regulation first. The Indian financial system has a tightly regulated traditional banking system. However, due to the state of advancement and dynamic development of the economy, a significant number of small and medium-sized enterprises are excluded from credit opportunities, as are poorer social groups that do not meet strict borrowing conditions. Thus, the target group of the shadow banking system comes from small businesses and the poorer, more difficult to reach, physically not easily accessible groups in the countryside. Due to low rural savings rates and low capital adequacy of enterprises in this area, funding is typically provided by money market participants (investment funds and commercial bonds), members of the traditional banking system (public and private commercial banks). These entities of funding however, when experiencing economic downturns may block these forms of funding from shadow bank players or declining confidence in the sector. In the case of the poorer sections of the population, the damage caused by weather disasters or even the measures taken as a result of the coronavirus epidemic, in the absence of reserves, can result in immediate borrowing becoming non-performing or overdue loans. Different regulatory frameworks significantly support the implementation of regulatory arbitrage in the case of traditional and shadow banking financial institution activities. By setting less stringent lending conditions for lower capital requirements, the RBI (Reserve Bank of India) has paved the way for smaller, shadow banking players to operate riskier, less prudent operations. However, for smaller credit institutions, these risks may add up and result in systemic risk. If they need significant external borrowing due to low capital and these funds are short-term, these non-bank financial companies can easily get into liquidity trap. Lending to higher-risk clients and projects further increases the risks, as they become the first in line, among insolvent debtors in a minor economic downturn. Further fundraising is not possible due to the risk-averse behavior of investors. If the monetary authority intervenes too late at this time, by its intervention itself can further increase the risk. There was an example of this series of events during 2018-2019 and this process can be expected to be strengthened, if during the coronavirus epidemic lock downs in the Indian economy in several waves should be implemented.
The research goal of the study was twofold. On the one hand, the expansion of the definition and temporal scope of shadow banking system operation, and on the other hand, the analysis of the shadow banking system of one of the most important emerging markets, in India.
In the course of the research, the authors broadened the definition defined by the FSB in that the concept of shadow banking, as defined by maturity and liquidity transformation and leverage and credit risk transfer. It should be extended to include securitization and illegal or unregulated credit activities, which have a longstanding history in rural India. The operation of the shadow banking system, expanded with the above activities, dates back the start of shadow banking into the early years of the 18th century. It extends the framework of shadow banking in the world economy through securitization until the beginning of the 20th century.
However, it is also important from the point of view of capital market supervision to define the activities of the shadow banking system. Based on this aspect, the probability of systemic risk materializing comes to the fore. Thus, the scope of activities and personnel that should be the focus of supervisory supervision can be defined in order – at the capital market supervision of a given national economy – to implement a successful macroprudential policy to prevent shadow banking panic in the form of liquidity crises. These non-bank financial corporations, also known as non-banking financial companies (NBFC), take different forms from country to country, but there are significant similarities in their activities and their risks. Members of the traditional banking system, especially universal banks, also carry out shadow banking activities on their own in their securities transactions. Therefore, in addition to a micro-level approach, a macroprudential approach to the supervision of shadow banking is also needed.
The impact of the coronavirus epidemic, the widespread, forced temporary suspension of economic activities, also has a negative impact on shadow bank players in both countries. The impact of the crisis not only will be felt after the different waves or after the payment moratoriums have expired, but the negative impact is already being felt as loans become increasingly non-performing if they are not part of the moratorium.
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associate professor University of Pécs Faculty of Law Department of Financial and Business Law email@example.com
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