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Shadow Banking

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The shadow banking system has expanded dramatically thanks to regulation. The term has been applied to the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks. Bernanke provided a definition in April 2012: “Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions–but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions.”

The typical shadow banking system includes securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies. However, the shadow banking area has grown in importance to rival traditional depository banking and was a primary factor in the subprime mortgage crisis of 2007-2008 and global recession that followed.

As regulation has sought to address the banking system after the subprime nightmare, all they have done is moved even more off-balance sheet from the banks into subsidiaries. The amount of reserves have been increased as a requirement for repos. Consequently, the money is then just moved off the books of the bank and into a subsidiary that has expanded the shadow banking realm all because Glass Steagal has not been restored. Probably the safest bank in New York these days is Bank of New York, They are the largest custodian and so conservative they may be hard to do business with in some cases. Effectively, anyone buying US treasuries one way or another goes through the Bank of New York.

The $2.3 trillion in excess reserves at the Fed is indicative of how banks are not lending money, but simply looking for profits without risk. The banks can earn 25 pips just parking at the Fed and they do not need to lend to cover their expenses. The Fed created the excess reserves in 2008 and that has now become an institutional function where the banks can hoard cash all they want.

There is a huge amount of cash floating around that is not invested in the share market nor is it being used to expand the economy. It is short-term money that is outside the realm of long-term investment.

Here is the first opening page of a very important report of the US share Market and Real Estate. It is vital that you understand what is really taking place to survive the next few years.

The Shift in Institutional Investment Page 1