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The shadow banking system exclusively comprises entities that are completely unregulated and operate outside any legal framework.
Answer: False
The assertion that the shadow banking system exclusively comprises entities that are completely unregulated and operate outside any legal framework is inaccurate. While these entities operate outside standard banking regulations and lack direct access to public liquidity or credit backstops, they are not entirely devoid of legal oversight or regulation in all aspects.
Pawn shops and payday lenders are examples of entities that can be part of the shadow banking system.
Answer: True
Entities such as pawn shops and payday lenders, which provide financial services outside the traditional banking regulatory framework, are indeed examples of non-bank financial intermediaries that can be considered part of the shadow banking system.
Ben Bernanke asserted that shadow banking entities perform functions distinct from traditional banking, such as risk arbitrage and market making.
Answer: False
Ben Bernanke asserted that shadow banking entities perform traditional banking functions, such as credit, maturity, and liquidity transformation, but do so outside the regulated depository institution system, rather than asserting they perform distinct functions like risk arbitrage and market making.
Structured Investment Vehicles (SIVs) and money market funds are entities typically excluded from definitions of the shadow banking system.
Answer: False
Structured Investment Vehicles (SIVs) and money market funds are commonly cited as integral components of the shadow banking system, not entities typically excluded from its definition.
Money market funds are often included in shadow banking definitions despite having simple structures and being highly regulated.
Answer: True
Money market funds are frequently included in shadow banking definitions, despite their relatively simple structures and regulatory oversight, due to their role in providing bank-like services outside traditional banking regulations.
Shadow banking institutions primarily act as direct lenders to individuals, bypassing intermediaries altogether.
Answer: False
Shadow banking institutions typically function as intermediaries, channeling funds from investors to borrowers, rather than acting as direct lenders to individuals while bypassing intermediaries.
According to the IMF, the primary functions of the shadow banking system are credit creation and deposit taking.
Answer: False
The IMF identifies securitization and collateral intermediation as key functions of the shadow banking system, not primarily credit creation and deposit taking, which are core functions of traditional banks.
Which of the following best defines the shadow banking system according to the provided text?
Answer: Financial intermediaries providing bank-like services outside standard banking regulations.
The shadow banking system is defined as a network of non-bank financial intermediaries that provide bank-like services, such as credit, maturity, and liquidity transformation, but operate outside the regulatory framework of traditional depository institutions.
According to Ben Bernanke, what are the core traditional banking functions performed by shadow banking entities?
Answer: Credit, maturity, and liquidity transformation.
Ben Bernanke asserted that shadow banking entities perform core traditional banking functions, specifically credit, maturity, and liquidity transformation, albeit outside the regulated depository system.
Which two functions does the IMF identify as key roles of the shadow banking system?
Answer: Securitization and collateral intermediation.
The International Monetary Fund (IMF) identifies securitization and collateral intermediation as the two primary functions performed by the shadow banking system.
Which of the following is an example of an NBFI that constitutes the shadow banking system?
Answer: A hedge fund
A hedge fund is a type of non-bank financial intermediary (NBFI) that operates within the shadow banking system, distinct from traditional commercial banks or central banks.
The term 'shadow banking' was proposed as an alternative to 'market-based finance' because it was considered more neutral.
Answer: False
The term 'shadow banking' was proposed by Paul McCulley. The alternative term 'market-based finance' was suggested as a more neutral descriptor, as 'shadow banking' was perceived by some as pejorative.
The term 'shadow banking system' was first used by former Federal Reserve Chair Ben Bernanke in 2007.
Answer: False
The term 'shadow banking system' was coined by Paul McCulley in 2007, not by former Federal Reserve Chair Ben Bernanke.
Paul McCulley's initial description of the shadow banking system focused on highly regulated, transparent financial structures.
Answer: False
Paul McCulley's initial description of the shadow banking system, characterized as 'the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures,' focused on complex, highly leveraged entities, not regulated, transparent structures.
According to Paul McCulley, the emergence of the shadow banking system dates back to the development of money market funds in the 1970s.
Answer: True
According to Paul McCulley, the emergence of the shadow banking system can be traced back to the development of money market funds in the 1970s.
The concept of credit growth by unregulated institutions is a purely modern phenomenon, emerging only after 2000.
Answer: False
The concept of credit growth by unregulated institutions is not a modern phenomenon; historical precedents and discussions regarding such activities date back much further, with references found as early as Friedrich Hayek in 1935.
Which term has been proposed as a more neutral alternative to 'shadow banking'?
Answer: Market-Based Finance
The term 'market-based finance' has been proposed as a more neutral alternative to 'shadow banking,' which some find to be a pejorative label.
The term 'shadow banking system' was coined by whom?
Answer: Paul McCulley
The term 'shadow banking system' was coined by Paul McCulley, an economist associated with PIMCO, in 2007.
What was Paul McCulley's initial characterization of the shadow banking system?
Answer: The 'alphabet soup of levered up non-bank investment conduits, vehicles, and structures.'
Paul McCulley's initial characterization of the shadow banking system was as 'the whole alphabet soup of levered up non-bank investment conduits, vehicles, and structures,' emphasizing its complexity and leverage.
What historical legal concept is mentioned as a precedent related to hidden debt and unregulated financial activities?
Answer: Twyne's Case
Twyne's Case, a 17th-century legal precedent concerning fraudulent conveyances, is mentioned as a historical legal concept related to hidden debt and unregulated financial activities, providing a precedent for concerns that echo in discussions of shadow banking.
Money market funds and repurchase agreement markets were identified by Ben Bernanke as key components of the shadow banking system.
Answer: True
Former Federal Reserve Chair Ben Bernanke identified money market funds and repurchase agreement markets as key components of the shadow banking system, alongside other entities like securitization vehicles and investment banks.
The 'originate-to-distribute' model involves banks originating loans and holding them on their balance sheets indefinitely.
Answer: False
The 'originate-to-distribute' model involves banks originating loans and then packaging them into securities to sell to investors, thereby transferring risk, rather than holding them on their balance sheets indefinitely.
Shadow banking entities like SIVs typically funded their long-term asset investments using long-term borrowing.
Answer: False
Shadow banking entities like SIVs and conduits typically funded their long-term asset investments using short-term borrowing from liquid markets, creating a maturity mismatch.
Credit derivatives like Credit Default Swaps (CDS) helped to decrease the overall credit available in the shadow banking system before 2008.
Answer: False
Credit derivatives like Credit Default Swaps (CDS) facilitated a massive expansion of credit within the shadow banking system before 2008, rather than decreasing the overall credit available.
Companies selling credit default swaps before 2008 were generally required to hold substantial capital reserves, similar to insurance companies.
Answer: False
Companies selling credit default swaps before 2008 were often not regulated as insurance providers and thus were not required to hold substantial capital reserves, contributing to systemic risk.
Rehypothecation, when considered, significantly reduced the estimated size of the US shadow banking system according to a 2010 IMF paper.
Answer: False
According to a 2010 IMF paper, the practice of rehypothecation, when considered, more than doubled the estimated size of the US shadow banking system, rather than reducing it.
Which of the following entities was NOT listed by Ben Bernanke as a key component of the shadow banking system?
Answer: Traditional commercial banks
While Ben Bernanke listed securitization vehicles, money market funds, and repurchase agreement markets as key components, traditional commercial banks, by definition, operate within the regulated banking system and are not typically considered part of the shadow banking system itself.
What funding method did shadow banking entities like SIVs and conduits typically rely on?
Answer: Short-term funding from liquid markets.
Shadow banking entities like SIVs and conduits typically relied on short-term funding from markets such as the money market and commercial paper markets to finance their longer-term, less liquid assets.
The 'originate-to-distribute' model primarily involves:
Answer: Banks packaging loans into securities and selling them to investors.
The 'originate-to-distribute' model involves financial institutions originating loans and then packaging them into securities (like ABS and CDOs) which are subsequently sold to investors, transferring the credit risk.
What was the approximate notional value of trades in the over-the-counter (OTC) derivatives market leading up to the 2008 crisis?
Answer: Over $650 trillion
The over-the-counter (OTC) derivatives market, heavily utilized by the shadow banking system, reached a notional value of over $650 trillion in trades leading up to the 2008 crisis.
Before the 2008 crisis, companies selling credit default swaps (CDS) often lacked sufficient capital reserves because they were:
Answer: Not regulated as insurance providers.
Before the 2008 crisis, companies selling credit default swaps (CDS) often lacked sufficient capital reserves because they were not regulated as insurance providers, unlike traditional insurers.
How did the practice of rehypothecation affect estimates of the US shadow banking system's size, according to a 2010 IMF paper?
Answer: It more than doubled the estimated size.
A 2010 IMF paper indicated that considering the practice of rehypothecation significantly increased estimates of the US shadow banking system's size, more than doubling it to over $10 trillion.
What role did structured investment vehicles (SIVs) and special purpose vehicles (SPEs) help major banks bypass?
Answer: Regulatory capital requirements
Structured Investment Vehicles (SIVs) and Special Purpose Vehicles (SPEs) were utilized by major banks to move assets and liabilities off their balance sheets, thereby bypassing regulatory capital requirements.
How do money market funds generally differ from investment banks in terms of risk profile?
Answer: Money market funds are considered less risky and typically unleveraged.
Money market funds are generally considered less risky and typically unleveraged, differing from investment banks which are often highly leveraged and subject to greater volatility.
What role did credit default swaps (CDS) play in the shadow banking system before the 2008 crisis?
Answer: They facilitated a massive expansion of credit.
Credit default swaps (CDS) played a crucial role in facilitating a massive expansion of credit within the shadow banking system prior to the 2008 crisis by enabling risk transfer and leverage.
What specific issue arose from companies selling credit default swaps before 2008, contributing to the crisis?
Answer: They were unregulated and lacked sufficient capital reserves to cover potential claims.
A specific issue arose because companies selling credit default swaps before 2008 were often unregulated as insurance providers, leading to insufficient capital reserves to cover potential claims, which contributed to the crisis.
High leverage in shadow banking only magnifies profits and has no significant impact during economic downturns.
Answer: False
High leverage in shadow banking magnifies both profits during economic booms and losses during downturns, posing significant systemic risks. It does not solely magnify profits without impact during downturns.
Shadow banks are considered vulnerable during market illiquidity primarily because they have direct access to central bank liquidity facilities.
Answer: False
Shadow banks are vulnerable during market illiquidity precisely because they lack direct access to central bank liquidity facilities, unlike traditional depository institutions.
Why are shadow banks particularly vulnerable during periods of market illiquidity?
Answer: They lack central bank backstops, rely on short-term funding, and hold illiquid assets.
Shadow banks are vulnerable during market illiquidity because they lack direct access to central bank liquidity facilities, depend heavily on short-term funding, and often hold illiquid assets, creating a precarious situation when funding dries up.
What is 'market exposure' in the context of shadow banking?
Answer: The total value of assets a financial institution holds or is responsible for.
'Market exposure' in the context of shadow banking refers to the total value of assets a financial institution holds or is responsible for, often indicating the extent of leverage employed.
The shadow banking system played a minor, negligible role in the 2007-2008 subprime mortgage crisis.
Answer: False
The shadow banking system played a significant and central role in the 2007-2008 subprime mortgage crisis, contributing substantially to the financial instability that led to the global recession.
Mortgage-backed securities purchased by shadow banks were often referred to as 'safe assets' during the boom period.
Answer: False
During the boom period preceding the 2007-2008 crisis, mortgage-backed securities purchased by shadow banks were often characterized as 'toxic assets' or 'legacy assets' as their value declined, not as 'safe assets'.
Securitization markets, crucial for shadow banking, remained fully functional throughout the 2008 financial crisis.
Answer: False
Securitization markets, which were crucial for shadow banking operations, became severely impaired and largely shut down during the 2008 financial crisis, demonstrating their fragility.
The failures of Bear Stearns and Lehman Brothers were primarily caused by their reliance on long-term, stable funding sources.
Answer: False
The failures of Bear Stearns and Lehman Brothers were primarily caused by their reliance on short-term, unstable funding sources in the capital markets, which became unavailable during the crisis, not long-term, stable sources.
Timothy Geithner attributed the 2008 credit market freeze mainly to a lack of demand for loans from businesses.
Answer: False
Timothy Geithner attributed the 2008 credit market freeze mainly to a 'run' on entities within the shadow banking system by their counterparties, highlighting the system's role in credit intermediation.
Which financial crisis is strongly linked to the activities and growth of the shadow banking system?
Answer: The Subprime Mortgage Crisis of 2007-2008.
The activities and rapid growth of the shadow banking system are strongly linked to the causes and severity of the Subprime Mortgage Crisis of 2007-2008.
What happened to securitization markets in the lead-up to and during the 2008 financial crisis?
Answer: They became impaired and largely shut down.
In the lead-up to and during the 2008 financial crisis, securitization markets, vital to shadow banking, experienced severe impairment and near cessation of activity.
The failure of which investment bank, requiring a government-orchestrated bailout, demonstrated the systemic risk posed by large, unregulated entities?
Answer: Long-Term Capital Management (LTCM)
The failure of Long-Term Capital Management (LTCM) in 1998, a highly leveraged and unregulated hedge fund that required a government-orchestrated bailout, demonstrated the systemic risk posed by large, unregulated entities within the financial system, which are characteristic of shadow banking.
Timothy Geithner stated that the freezing of credit markets in 2008 was largely due to what?
Answer: A 'run' on entities within the shadow banking system by their counterparties.
Timothy Geithner stated that the freezing of credit markets in 2008 was largely due to a 'run' on shadow banking entities by their counterparties, highlighting the system's role in credit intermediation.
Paul Krugman argued that regulators should have extended oversight to the shadow banking system much earlier.
Answer: True
Paul Krugman argued that regulators should have extended oversight to the shadow banking system much earlier, criticizing the lack of regulation as 'malign neglect'.
The IMF suggested that regulating traditional banks more strictly was the sole priority to address shadow banking risks.
Answer: False
The IMF suggested that addressing shadow banking risks required a broader approach than solely regulating traditional banks more strictly, emphasizing the need to manage spillover effects and systemic risk within the shadow system itself.
Paul Krugman used the term 'malign neglect' to criticize:
Answer: The failure of regulators to extend oversight to the growing shadow banking system.
Paul Krugman used the term 'malign neglect' to criticize the failure of regulators to extend oversight and safety nets to the rapidly expanding shadow banking system.
What did Benoît Cœuré of the ECB suggest should be the primary focus to avoid future financial crises?
Answer: Controlling shadow banking activities.
Benoît Cœuré of the ECB suggested that controlling shadow banking activities should be the primary focus to avoid future financial crises, noting its continued risks despite efforts to regulate traditional banks.
According to S&P Global estimates, the financial assets held by the shadow banking system in 2022 were approximately equal to global GDP.
Answer: False
According to S&P Global estimates for the end of 2022, the shadow banking system held approximately $63 trillion in financial assets, which represented 78% of global GDP, not an amount equal to global GDP.
The shadow banking system has experienced a decrease in its financial asset value since 2009.
Answer: False
Contrary to the statement, the shadow banking system has experienced significant growth since 2009. Its financial assets increased from $28 trillion (68% of global GDP) in 2009 to $63 trillion (78% of global GDP) by the end of 2022.
The Financial Stability Board (FSB) estimated the global shadow banking system size to be around $60 trillion in late 2011.
Answer: True
The Financial Stability Board (FSB) estimated the global shadow banking system size to be around $60 trillion in late 2011, with estimates for the 11 largest national systems totaling $51 trillion.
What was the approximate value of financial assets held by the global shadow banking system at the end of 2022, as a percentage of global GDP?
Answer: Approximately 78% of global GDP.
S&P Global estimates indicated that at the end of 2022, the financial assets held by the global shadow banking system amounted to approximately $63 trillion, representing 78% of global GDP.
How did the size of the shadow banking system change between 2009 and 2022?
Answer: It increased from $28 trillion to $63 trillion.
The size of the shadow banking system has grown substantially between 2009 and 2022, increasing from approximately $28 trillion to $63 trillion in financial assets.
According to the Financial Stability Board (FSB), what was the estimated size of the worldwide shadow banking system in 2016?
Answer: Approximately $100 trillion
According to the Financial Stability Board (FSB), the worldwide shadow banking system was estimated to total approximately $100 trillion in 2016.
The fact that US financial institutions loaned over $1 trillion to shadow banks by 2024 indicates what?
Answer: The continued deep integration and financial interdependence between traditional and shadow banking sectors.
The fact that US financial institutions loaned over $1 trillion to shadow banks by 2024 indicates the persistent and deep integration and financial interdependence between traditional and shadow banking sectors, even post-2008.