Essays on Intermediation and Regulation in the Banking System and the Ongoing Financial Crisis since 2007 Coursework

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The paper "Intermediation and Regulation in the Banking System and the Ongoing Financial Crisis since 2007" is a perfect example of finance and accounting coursework.   Financial intermediaries and banks play a pivotal role in channelling funding from savers to the borrowers. In this regard, the management of the balance sheet of financial intermediaries has a great impact on the entire economy as a whole. The financial crisis witnessed in almost the whole world stressed the importance of right functioning of the intermediary sector, and the essence of understanding mechanics, motivation, and the impact of intermediaries on the management of the balance sheet (Markus, 2009, p. 83).

Credit intermediation involves activities and entities that are found outside the regular banking system. Market imperfection brings about financial intermediaries resulting in what is called shadow banking. Shadow banks refer to financial intermediaries that carry out maturity, liquidity and credit transformation without having to grow through the central bank liquidity or credit guarantees in the public sector. Examples of shadow banks are structured investment vehicles, finance companies, conduits, asset-backed commercial paper, limited-purpose finance companies, money market mutual funds, credit hedge funds, government-sponsored enterprises, and securities lenders.

Shadow banks have vertically integrated interconnections and a long chain of intermediation; which intermediates credit by use of a range of securitization and funding techniques that are secured like Asset-backed securities, ABCP, repo, and collateralized debt obligation (Kothari, 2010). This chain of intermediation binds shadow banking into a network that can be rightly be referred to as the shadow banking system. The traditional banking system is rivalled by the shadow banking system in regard to the intermediation of credit to businesses and households.

Financial intermediaries are responsible for borrowing from one cartel of agents and lending it to another cartel of agents (Allen & Gale, 2000, p. 26). Intermediaries lending and borrowing groups are large; indicating diversification on either side of the balance sheet. The claims that intermediaries issue to borrowers and lenders contain different state-contingent payoff. Financial intermediaries, therefore, lend to a huge number of firms and consumers utilizing debt contracts and they also borrow of a huge number of agents using debt contracts. A substantial part of the borrowing on the liability side is in the form of demand deposits, securities that possess the important feature of being a medium of exchange.

The objective of the intermediation theory is explaining the essence of the existence of financial intermediaries and why there are organizations with similar characteristics. Over past years, the shadow banking system availed sources of funding for credit that was inexpensive through the conversion of risky, opaque, long-term assets into riskless and money-like short liabilities (Allen & Gale, 2000, p. 26). Credit and maturity transformation in the shadow banking system contributed substantially to assets bubbles in commercial and residential real estate markets days preceding the financial crisis.  

Bibliography

Reinhart, C & Rogoff, K, 2009, This Time is Different: Eight Centuries of Financial Folly, Princeton University Press: Princeton. P496

Ferguson N, 2009, The Ascent of Money: A Financial History of the World, Penguin: London. p. 448

Allen, F & Gale, D, 2000, 'Financial contagion', Journal of Political Economy 108 (1), pp. 1–33

Simkovic, M., 2009, Secret Liens and the Financial Crisis of 2008, American Bankruptcy Law Journal , Vol. 83, p. 253

Cipriani, M. & Guarino, N 2008, 'Herd Behavior and Contagion in Financial Markets' The B.E. Journal of Theoretical Economics" 8(1) (Contributions), Article 24, pp. 1–54

Dorn N, 2010, The Governance of Securities: Ponzi Finance, Regulatory Convergence, Credit Crunch, British Journal of Criminology, 50, 1, pp 23–45.

Strauss K.D, 2008, 'A systemic crisis demands systemic solutions', The Financial Times, September 25,

Kothari, V., 2010, Executive Greed: Examining Business Failures that Contributed to the Economic Crisis. Palgrave Macmillan: New York.

Markus B., 2009, Deciphering the liquidity and credit crunch 2007–200'. Journal of Economic Perspectives 23 (1), 77–100.

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