hat said, there were some troubling properties associated with the growth of shadow banking. For instance, quite a few were sponsored by banks as a means to reduce the amount of capital to be held against risk exposures. When the crisis hit, in a number of cases those banks found they had to stand behind their offshoots for contractual or reputational reasons, so the separation was illusory and led to greater leverage in the system. Another issue was that the originate and distribute model of securitisation was often opaque and led to insufficient genuine risk transfer away from the banking system, in ways that became very problematic when the crisis hit. Shadow banks, also neglected the funding side of their balance sheets, so that they came to depend upon using their assets as security to obtain funding, often from banks. This is quite different from the traditional model of deposit funded banking where the assets (loans) are not used as security for raising funds. However, it must be said that in the run-up to the crisis, banks too came to depend overly on such secured funding. When the crisis hit, the value of the assets used as security for collateral fell, funding conditions tightened and in some instances were cut off. 2 These weaknesses meant that the counterbalancing behaviour of shadow banks vanished. Instead, they retracted just as banks did, but much more violently, which exacerbated the magnitude of the crisis.
Accordingly, any policy wishing to be effective in enhancing productivity must be underpinned by incentives to save and the lifting of any related institutional obstacles, something which is also connected to the reforms that boost competitiveness and legal certainty. Spain must persist with reform policy geared to these objectives. Thank you. 4  BIS central bankers’ speeches