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Tuesday, 4 July 2017

The Role of Shadow Banking in the Business Cycle

By Arkadiusz SieroĊ„

ABSTRACT: The aim of this article is to examine the impact of shadow banking on credit expansion and the business cycle. I focus on two main functions of the shadow banking system: securitization and collateral-intermediation. The former enables traditional banks to expand their credit activity, while the latter allows the shadow banks to create new money by themselves. Shadow banking shows that non-banking institutions can also conduct credit expansion and generate the business cycle. Thus, the Austrian business cycle theory should be extended to take into account the way in which shadow banking activity changed the conduct of credit expansion.

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