The rise of Shadow Banking Money in the digital Age The Future of - - PowerPoint PPT Presentation

The rise of Shadow Banking

The Future of Money Frankfurt, 24. Nov 2018 Jonathan McMillan

Money in the digital Age

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Fractional actional Res eser erve ve Ba Banking king is is fragil gile

Source: Bundesarchiv, Bild 102-12023 / Georg Pahl / CC-BY-SA 3.0

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Fragil ile e Business ss Model del Privile leges ges (e.g. .g. pub ublic c gua uarant ntees) es) Moral l hazar ard Const nstraints raints (e.g. .g. capital al requi uire reme ments) nts)

Frag agility ility ca call lls s for Ba Banking king reg egula lation tion

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Bu But wa wait it, what t abo bout ut MBS BS,CDO,C ,CDO,CDS,REPO DS,REPO & & CO

Source: Unknown (from https://assets.nerdwallet.com/blog/wp-content/uploads/2017/02/Bookkeeper-and-teller.jpg)

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Wel elco come me to Mode dern rn Fin inanc ance

Source: Pozsar et al. (2010)

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Source: Pozsar (2010)

Ultim imat ate Lender Ultim imat ate Borrower er

The e sig ignatur ature e pr product duct of the e fin inancial ncial cr cris isis is of 20 2008 08

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Source: Pozsar (2010)

Ultim imat ate Lender Ultim imat ate Borrower er

The e sig ignatur ature e pr product duct of the e fin inancial ncial cr cris isis is of 20 2008 08

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

The e Ris ise e of Sh Shado dow w Ba Banking king

Ultim imat ate Lender Ultim imat ate Borrower er

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Sh Shadow dow ba banking king is is im impo portant ant

Source: McMillan (2014), based on Adrian, Covitz, and Nellie (2014) and Federal Reserve Fund of Flows Data

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Bu But, , why so co compl mplicat icated? ed?

Lenders Borrower ers

Source: Pozsar et al. (2010)

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Fragil ile e Business ss Model del Privile leges ges (e.g. .g. pub ublic c gua uarant ntees) es) Moral l hazar ard Const nstraints raints (e.g. .g. capital al requi uire reme ments) nts)

It’s the regulation, stupid!

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Fragil ile e Business ss Model del Privile leges ges (e.g. .g. pub ublic c gua uarant ntees) es) Moral l hazar ard Const nstraints raints (e.g. .g. capital al requi uire reme ments) nts)

It’s the regulation, stupid!

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Reg egulating lating ba banks ks in in the e in indu dustri trial al age ge

Lenders Borrower ers Bank

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Regulating banks in the digital age? Difficult …

Lenders Borrower ers Bank

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

… really difficult

Lenders Borrower ers Bank

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

… actually, impossible

Lenders Borrower ers

Source: Pozsar et al. (2010)

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Narrow

• w ba

banke nkers s run in into

• the

e same me pr problem blem as reg egulat lator

• rs

Photo: Valerie Hinojosa (CC BY-SA 2.0)

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Narrow

• w Ba

Banking king in in the e di digi gital al age ge

Photo: Composita, CC0 Creative Commons

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

The e Sy System emic ic So Solv lven ency cy Rule le

The value of the real assets of a company has to be greater or equal to the value of the company’s liabilities in the worst financial state

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

The e Sy System emic ic So Solv lven ency cy Rule le

Non

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inancial ial com

• mpanies

anies

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

The e Sy System emic ic So Solv lven ency cy Rule le

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inancial ial com

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anies Financia ancial l compa panies nies

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utua ual Fun unds ds

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ending g Platform

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www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

The e Sy System emic ic So Solv lven ency cy Rule le

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inancial ial com

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anies Financia ancial l compa panies nies

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utua ual Fun unds ds

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ending g Platform

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king g Inst stitu tuti tion

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www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

The e End d of Ba Banki king ng – The e Bo Book

What is it about ut? The End of Banking distinguishes itself from other books about the financial crisis of 2007–08 in several ways. First, it reveals the fundamental financial techniques that are common to all forms of banking—whether it is performed by medieval goldsmiths or by today’s managers at investment banks. Second, it offers a lucid and accessible account of shadow banking. Third, and most importantly, The End of Banking does not rehash the same old regulatory patches or radical reform proposals from the past. Instead, it elaborates a new and intuitive idea of how to adapt the financial system to the digital age.

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

The e End d of Ba Banki king ng – The e Bo Book

What ot

• thers think

k about ut it: «An interesting and challenging vision» (Vítor Constâncio, Vice-President of the European Central Bank) «An important book about finance» (Reuters Breakingviews, Dominic Elliott) «An absolutely new perspective» (Financial Times Alphaville, Izabella Kaminska) «This thought-provoking book makes radical proposals that strike at the source of fragility in banking and which should be considered seriously.» (Anat R. Admati, Professor of Finance and Economics, Stanford Graduate School) «The End of Banking is easily the ‘deepest’ examination of our financial system in a generation.» (Robert C. Hockett, Professor of Law, Cornell University) «In this book, McMillan embraces the digital revolution and shows, clearly and compellingly, how it can be used to create a financial system that is much better, much simpler and much fairer. Read it urgently and dare to think big.» (William R. White, Chairman of the Economic and Development Review Committee at the OECD) Find out more on www.endofbanking.org

www.endofbanking.org @EndOfBanking The Future of Money, Frankfurt

Imp mpre ressu ssum

• Dr. Jürg Müller

Neue Zürcher Zeitung NZZ Falkenstrasse 11 Postfach 8021 Zürich +41 44 258 10 40 juerg.mueller@nzz.ch Twitter: @muellerjuerg www.endofbanking.org Twitter: @EndOfBanking