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The financial enterprises that operate outside the regular commercial banking system include financial special purpose vehicles and funds (money market, investment and hedge funds). In addition, specific activities (including securitisations and securities financing transactions) also count as shadow banking.
The growing importance of shadow banking entities is often analysed from a financial stability perspective. However, it is also relevant from a monetary policy stance as it affects monetary analysis on the one hand and because it can impact on the effectiveness of monetary policy measures on the other. For instance, the provision of bank-like services by shadow banking entities or greater interaction between shadow banks and commercial banks may imply an incomplete or distorted representation of the money and credit supply, which is relevant for assessing economic activity and the trends in the price of goods. So far, in its monetary analysis, the Eurosystem has addressed the risk that increased shadow banking activity could reduce the informational content of monetary indicators by incorporating selected shadow banking entities (money market funds) into the calculation of monetary aggregates and by adjusting these aggregates for certain transactions (eg securitisation). These corrections – in combination with an increase in the analysis of sectoral shifts in money holding – currently ensure that the data on monetary aggregates are sufficiently robust.
Given the financial sector’s central role in the transmission of monetary policy, the greater importance of shadow banks could, in principle, also change the way in which monetary policy works. As the corresponding research for the euro area is still in its early stages – which is likely to be due to the insufficient availability of statistical data on the shadow banking system – it is only possible at this point to bring forward some conceptual considerations. First, the increase in shadow banking activity is likely to expand the non-financial sector’s range of financing and investment opportunities, which, by itself, tends to weaken the transmission of monetary policy measures via commercial banks. Second, an increase in shadow banking also implies that market-based variables have become more important in monetary policy transmission, in particular asset prices, which, taken in isolation, increases the effectiveness of monetary policy measures. Overall, it is therefore not necessary to assume that the greater importance of shadow banks will change the effectiveness of monetary policy but rather the relative importance of individual transmission channels.
Summary of the March Monthly Report
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