Claudia Gabriela Baicu

The Interconnections between the Shadow Banking System and the Regular Banking System: Evidence from the Euro Area

One of the most important lessons of the global financial crisis has been the deep interconnectedness between the shadow banking system and the regular banking system. These two systems are linked through several channels, of which one of the most important is the financing provided by regular banks to the shadow banking system and vice versa. In addition, regular banks can originate loans that are securitized. Subsequently, part of the securitized instruments may remain on the balance sheet of the originating banks or be found on the balance sheet of other regular banks and shadow banking entities. These links between the two systems can increase contagion and systemic risks, which in turn may affect financial stability. The financial crisis has acutely revealed the negative effects these interconnections can generate. The interconnections are underestimated by the available data because of the difficulties in gathering information on the euro area. Within this context, our paper tries to evaluate and analyze the interconnections between the shadow banking system and the regular banking system within the euro area, both in the pre-crisis period and currently. Finally, some measures to regulate the interconnections between these two systems are raised.

Financial Crisis, Regulation and Competition: The Romanian Banking Experience☆

Abstract By the early 1970s, competition in the banking system was limited. Reduced competition in the banking system was due to regulations adopted by many countries after the financial crisis of the 1930s. At that time, authorities believed that the high risks which banks have assumed, in a fierce competition context, led to destabilization of the financial system. After the 1980s, deregulation, financial liberalization and technological change were important factors that have led to increased competition in the banking sector. Therefore, an important issue for regulators and supervisors is the relationship between competition in the banking system and financial stability. The specialty literature, both theoretical and empirical, has not reached a consensus on the effects of competition on financial stability. This problem became more acute under the global financial crisis. Against this background, the paper analyses the role of competition in the Romanian banking system in the context of the global crisis. The paper is structured as follows: the first section reviews the arguments supporting that increased competition in banking system leads to improved financial stability; the counterarguments are mentioned later. The role of regulations in managing the competition in banking system is also emphasised. The last section analyzes developments on competition and stability in the Romanian banking system.