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

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

How exactly does this securitization affect the credit business and expansion period?

The very first effectation of securitization is to move the credit danger of the loans through the banking institutions’ balance sheets towards the investors through asset-backed securities (Gertchev, 2009). This ‘regulatory arbitrage’ enables institutions to circumvent book and money adequacy demands and, consequently, to improve their credit expansion. The reason being banking institutions have to hold a level that is minimum of capital in terms of risk-weighted assets. Whenever banking institutions sell the pool of dangerous loans up to an entity that is third they reduce steadily the number of dangerous assets and enhance their money adequacy ratio. By doing so, the transfer of loans increases banks’ possible to produce further loans without increasing money. 11

The part of shadow banking in credit expansion might be illustrated by the undeniable fact that assets within the shadow bank system expanded quickly prior to the crisis, from $27 trillion in 2002 to $60 trillion in 2007, which coincided with razor- sharp development additionally in bank assets (Financial Stability Board, 2011, p. 8). Securitization creates, hence, the impression that those activities of this banks that are commercial 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. This means that, securitization expands the supply of credit by increasing the way to obtain pledgeable assets.

2nd, securitization may be carried out for the true purpose of utilising the securities developed as collateral utilizing the main bank to get capital (Financial Stability Board, 2013, pp. 17–18).