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II. The effect of Shadow Banking regarding the Traditional Banks’ capability to Expand Credit

II. The effect of Shadow Banking regarding the Traditional Banks’ capability to Expand Credit

How exactly does this securitization impact the credit expansion and company period?

The very first aftereffect of securitization is always to move the credit threat of the loans through the banking institutions’ balance sheets into the investors through asset-backed securities (Gertchev, 2009). This ‘regulatory arbitrage’ enables institutions to circumvent book and money adequacy demands and, consequently, to enhance their credit expansion. The reason being banking institutions have to hold a level that is minimum of money in terms of risk-weighted assets. Whenever banking institutions offer the pool of high-risk loans up to a 3rd entity, they reduce the level of high-risk assets and enhance their money adequacy ratio. By doing so, the transfer of loans increases banks’ possible to generate further loans without increasing capital. 11

The part of shadow banking in credit expansion can be illustrated because of the undeniable fact that assets within the shadow bank operating system expanded quickly prior to the crisis, from $27 trillion in 2002 to $60 trillion in 2007, which coincided with razor- sharp growth additionally in bank assets (Financial Stability Board, 2011, p. 8). Securitization creates, therefore, the impression that those activities of this commercial banking institutions are less inflationary than they are really. The role of monetary policy in this way banks are able to grant as much in new loans as credits that have been securitized, which weakens the link between monetary base and credit supply, and, in consequence.