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Finance, Innovation and Regulation Working Group

Dates:
  • Mon 30 Nov 2020 13.00 - 14.30
  Add to Calendar 2020-11-30 13:00 2020-11-30 14:30 Europe/Paris Finance, Innovation and Regulation Working Group

The vulnerabilities of debt in the shadow banking sector

presentation by Ross Spence (Ph.D. Fellow, EURO-CEFG/Leiden University)

and

A historical inquiry on the shadow banking (system) and the role of law in its shaping

presentation by Evgenia Ralli (Ph.D. Researcher, European University Institute)

Chair: Nikita Divissenko (Department of Law, EUI)

Monday 30 November  13:00 – 14:30 CET, via Zoom

Abstracts

1. The vulnerabilities of debt in the shadow banking sector By Ross Spence

An essential pillar of the shadow banking sector ( SBS ) is the creation of ‘safe’ debt - transforming long term risky assets (for example bonds) into short term, safe ones (for example cash). Traditionally, only credit institutions could create safe debt by way of demand deposits but demand has now grown. The SBS has therefore managed to successfully replicate the functions of the traditional banking sector ( TBS ) by creating a variant of demandable debt, which is short-term, not subject to deposit insurance and credibly backed by a direct claim on liquidity. However, the SBS cannot produce ‘riskless’ debt. Because debt in the SBS is not riskless, it is vulnerable to not being rolled-over when market participants begin to suspect problems with the underpinning assets used for financial collateral ( FC ) and margining purposes. This makes SBS produced debt ‘runnable’. In the SBS, a run is systemic event and generally a precursor to crises. When runs happen, asset prices crash, margin levels increase and fire sales ensue resulting in a cumulative downward spiral. The situation becomes particularly precarious when highly leveraged financial institutions are forced to de-leverage precisely at a time when market volatility is high and asset prices are low.

2. A historical inquiry on the shadow banking (system) and the role of law in its shaping By Evgenia Ralli

Since the Great Recession, a new term has appeared within the economic, political and regulatory lexicon worldwide and specifically in the EU: the shadow banking system (SBS). Apart from the non-acceptance of one common definition there is also no agreement concerning the birth of the SBS as two main strands of literature can be identified so far. Firstly, most scholars are defending the recent nature of the shadow banking phenomenon starting from 1960s till 1970s. However, some scholars identify its existence already from the 18th century.

The main objective of this chapter is to examine the latter strand of the literature, as well as whether the existing literature on the history of banking can provide any further evidence or explanations concerning the SBS and the role of law in its shaping. Additionally, the chapter focuses on Europe.

Starting with a presentation of the evident difficulty of adopting one name, the chapter analyses the existing literature concentrating, on the one hand, on SBS and financial crises and, on the other hand, on SBS within a non-crisis context. Aiming to further explore the modern concept of shadow banking in relation to the notion of traditional banking, the chapter provides a historical inquiry of the concepts of banking and bank. Through this inquiry, it is expected to comprehend whether those concepts were static or developing, whether they were clear and especially clearly distinguished from each other and other ones, and which is the role of law in their shaping.

 

All interested fellows, Ph.D. researchers, professors and visiting academics are invited to participate. To register for the event, please send an e-mail by the 23th of November 2020 to [email protected]. The papers and zoom link will be shared with registered participants prior to the event.

 

For more information about the Finance, Innovation and Regulation Working Group please follow this link.

Outside EUI premises - ZOOM DD/MM/YYYY
  Outside EUI premises - ZOOM

The vulnerabilities of debt in the shadow banking sector

presentation by Ross Spence (Ph.D. Fellow, EURO-CEFG/Leiden University)

and

A historical inquiry on the shadow banking (system) and the role of law in its shaping

presentation by Evgenia Ralli (Ph.D. Researcher, European University Institute)

Chair: Nikita Divissenko (Department of Law, EUI)

Monday 30 November  13:00 – 14:30 CET, via Zoom

Abstracts

1. The vulnerabilities of debt in the shadow banking sector By Ross Spence

An essential pillar of the shadow banking sector ( SBS ) is the creation of ‘safe’ debt - transforming long term risky assets (for example bonds) into short term, safe ones (for example cash). Traditionally, only credit institutions could create safe debt by way of demand deposits but demand has now grown. The SBS has therefore managed to successfully replicate the functions of the traditional banking sector ( TBS ) by creating a variant of demandable debt, which is short-term, not subject to deposit insurance and credibly backed by a direct claim on liquidity. However, the SBS cannot produce ‘riskless’ debt. Because debt in the SBS is not riskless, it is vulnerable to not being rolled-over when market participants begin to suspect problems with the underpinning assets used for financial collateral ( FC ) and margining purposes. This makes SBS produced debt ‘runnable’. In the SBS, a run is systemic event and generally a precursor to crises. When runs happen, asset prices crash, margin levels increase and fire sales ensue resulting in a cumulative downward spiral. The situation becomes particularly precarious when highly leveraged financial institutions are forced to de-leverage precisely at a time when market volatility is high and asset prices are low.

2. A historical inquiry on the shadow banking (system) and the role of law in its shaping By Evgenia Ralli

Since the Great Recession, a new term has appeared within the economic, political and regulatory lexicon worldwide and specifically in the EU: the shadow banking system (SBS). Apart from the non-acceptance of one common definition there is also no agreement concerning the birth of the SBS as two main strands of literature can be identified so far. Firstly, most scholars are defending the recent nature of the shadow banking phenomenon starting from 1960s till 1970s. However, some scholars identify its existence already from the 18th century.

The main objective of this chapter is to examine the latter strand of the literature, as well as whether the existing literature on the history of banking can provide any further evidence or explanations concerning the SBS and the role of law in its shaping. Additionally, the chapter focuses on Europe.

Starting with a presentation of the evident difficulty of adopting one name, the chapter analyses the existing literature concentrating, on the one hand, on SBS and financial crises and, on the other hand, on SBS within a non-crisis context. Aiming to further explore the modern concept of shadow banking in relation to the notion of traditional banking, the chapter provides a historical inquiry of the concepts of banking and bank. Through this inquiry, it is expected to comprehend whether those concepts were static or developing, whether they were clear and especially clearly distinguished from each other and other ones, and which is the role of law in their shaping.

 

All interested fellows, Ph.D. researchers, professors and visiting academics are invited to participate. To register for the event, please send an e-mail by the 23th of November 2020 to [email protected]. The papers and zoom link will be shared with registered participants prior to the event.

 

For more information about the Finance, Innovation and Regulation Working Group please follow this link.


Location:
Outside EUI premises - ZOOM

Affiliation:
Department of Law

Type:
Working group

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