The growth of shadow banking, a systemic risk perspective

Details

Supervisors

Candelon, Bertrand

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

enThis thesis examines the phenomenon of non-bank financial intermediation (NBFI), commonly referred to as “shadow banking,” as a dynamic, yet potentially fragile component of modern credit intermediation. Originating from an internship within the alternative-credit department of a leading European asset manager, the research was motivated by personal exposure to private credit markets, and the investigation of mechanisms that contributed to the 2007–2008 subprime crisis. The study addresses the following research question: What is shadow banking, what structural and macro-financial factors have shaped its past and ongoing evolution, and through which transmission channels does it generate and amplify systemic vulnerabilities within the global financial architecture? The analysis is threefold: 1) Defining NBFI and isolating its “narrow” segment most prone to systemic spillovers, using the Financial Stability Board’s (FSB) functional taxonomy. 2) Examining the links between regulatory arbitrage, particularly in the context of successive Basel reforms, and the NBFI growth. 3) Conducting a large-scale quantitative investigation of NBFI growth drivers, supported by FSB data (2002–2023), and deploying a fully automated Python pipeline to estimate over 80 million statistical models. Findings reveal key asymmetric, function-specific responses of NBFIs to macro financial/economic and structural factors. These results underscore the need for differentiated function-based monitoring to address systemic risks without undermining market efficiency. The thesis further highlights the deep interconnection between traditional and shadow banks, considering financial innovation, monetary policies and investors preferences.