Shadow Banking and Systemic risk

Details

Supervisors

Petitjean, Mikael

Faculty

Louvain School of Management

Degree label

Master [120] en ingénieur de gestion

Abstract

The aim of this thesis is to provide an overview of the shadow banking through a theoretical and empirical analysis. The theoretical part introduces the main components of the shadow banking system through the growing literature. This analysis points out that : 1) shadow banking system and its different actors are interconnected with the traditional banking system, 2) the system is evolving in a lightly regulated framework and without public-sector backstops, and 3) shadow banking has a certain weight (between 13.6% and 30% in 2018) in the global financial system. The complexity of shadow banking system, its importance, and its environment conducive to the spread of risks make it an interesting subject to study under the aspect of risk to financial stability. For this reason, the empirical study deals with the effects of shadow banking activity on risks (Baseline model) and how good corporate governance can influence the effect of shadow banking on risks (Extended model). To achieve these objectives, we adapt the methodology of Wua and Shen (2019) to our sample constituted of 21 western banks from 2011 to 2019. Further, we differ from their study by using different proxies for bank characteristics and shadow banking measures. Our main shadow banking measure is defined as the ratio of securitisation activity of a bank on its total assets. The results from the baseline model are in line with the findings of Altunbas et al. (2019) which conclude that “there is no evidence that banks that are more active in securitisation markets take more risks”. As for the extended model, we observe that, depending on the corporate governance proxy used, it enhances, mitigates, or has no effect on the relation found thanks to the baseline model. However, the results of the extended model must be considered with great care because endogeneity is an issue. These findings are subject to certain limitations such as the sample size and the shadow banking proxy used.