Acharya and P. Schnabl (2010), “Do Global Banks Spread Global Imbalances? The Case of AssetBacked Commercial Paper During the Financial Crisis of 2007–09,” paper presented at the 10th Jacques Polak Annual Research Conference, 5–6 November 2009. 6  BIS Review 83/2010  better managed public finances will pay lower risk premia, and therefore lower interest rates, which, in turn, will help them to keep budget deficits and the stocks of national debt under control. Countries with larger budget deficits and higher stocks of national debt, on the other hand, will face higher risk premia, and therefore higher interest rates, which, in turn, will affect their ability to control the dynamics of their public finances. How will a central bank committed to price stability and endowed with the constitutional guarantees necessary to enforce a price stability-oriented policy pursue its mandate in a high-debt / high-risk environment? Sovereign securities have traditionally been the prime form of collateral for central bank credit. In the future, given the greater importance of this type of debt instrument in the total portfolio of the economy – to which I was referring before – this primary role is unlikely to diminish. So, a central bank will continue to emphasise strongly the maintenance of orderly market conditions for this type of instrument. The ECB’s Securities Markets Programme has demonstrated how critical it is for a central bank to safeguard the functioning of this segment of the market. 1.
If we want central bank control over leverage to be stronger in the future, shadow banks need to be part of what we consider “banks” tout court. In fact, by 2007 the size of the official and shadow banking systems, measured by the total amount of assets, had become essentially the same. 3 But there is also an issue of quality – or, if you prefer, of composition – of finance. Due to the increased risk aversion resulting from the financial crisis, collateralised lending is bound to increase in the future, even in markets where traditionally unsecured lending was the most important source of finance (e.g., the euro area interbank market). As a consequence, the demand for securitised assets – of the type that shadow banks have learned to create in the past – is set to increase further in the future, as institutions demand such types of debt to use as collateral. To put it in a nutshell, we will continue to need the functions, the financial products and the expertise that the shadow banks have been offering. But, we need to make sure that these activities are performed in a non-disruptive way. The new financial landscape can also reinforce the effectiveness of monetary policy. I already mentioned that most of the funding of financial institutions – whether banks, brokerdealers, hedge funds or shadow banks – is short-term. In other words, a key function of the financial system is maturity transformation.