Conglomeration synergies
In this article, Cetorelli and Prazad, examine the joint evolution of banks and shadow banks (NBFIs) inside the organizational structure of bank holding companies (BHCs). They use a database of the organizational structure of all BHCs ever in existence since the 1970s to track each subsidiary in the banking industry, map the subsidiary to its direct parent and to its ultimate parent, and track the activity that the subsidiary is engaged in. Their findings include:
- Banks adapted their business models and increasingly incorporated shadow bank activities, involving the provision of specialized services in support of the securitization process, under their organizational umbrellas to take advantage of synergistic benefits.
- The number of shadow bank subsidiaries nested under a bank, and thus part of a bank’s direct control chain within a BHC, has been quite substantial over the years.
- The evidence suggests that there exist important conglomeration synergies for BHCs to having both banks and NBFIs under the same organizational umbrella.
The Nonbank Shadow of Banks
Authors: Nicola Cetorelli, Saketh Prazad
From: Federal Reserve Bank of New York
How interwoven have banks and shadow banks become?
In this paper, Acharya et al. challenge the common view that banks and NBFIs operate either in parallel, performing different activities, or as substitutes, performing similar activities as a for of regulatory arbitrage. Instead, the authors confirm the findings of Cetorelli and Prazad above that the two sectors are interwoven, with risks transforming over time, particularly in response to regulation. Banks continue to play a special role as liquidity providers for NBFIs, both under routine conditions and in times of stress. In particular, put forth a “transformation view”:
[I]n which NBFIs and banks structure their intermediation businesses so as to loosen regulatory constraints and lower regulatory costs while retaining the liquidity benefits of the banking industry from deposit franchises and explicit or implicit access to official backstops. According to this view, the intermediation activities of NBFIs and banks are not distinct from one another or the same as one another but interwoven in complex ways.
They support this view with a variety of evidence:
- Enhanced financial accounts data for the United States show that banks and NBFIs finance each other, with NBFIs particularly dependent on banks.
- Case studies and confidential regulatory data reveal that banks remain exposed to credit and funding risks that appear to have moved to NBFIs, as well as to contingent liquidity risk via credit lines to NBFIs.
- Empirical work confirms bank-NBFI linkages through the correlation of their abnormal equity returns and market-based measures of systemic risk.
The authors conclude that regulation should consider the two sectors holistically, recognizing new mechanisms for risk propagation and amplification due to the evolving nature of their funding linkages.
Where Do Banks End and NBFIs Begin?
Authors: Viral V Acharya, Nicola Cetorelli, Bruce Tuckman
From: New York University, Federal Reserve Bank New York
