The Evolution of Banks and Financial Intermediation: Framing the Analysis

By Cetorelli, Nicola; Mandel, Benjamin H. et al. | Federal Reserve Bank of New York Economic Policy Review, July 2012 | Go to article overview

The Evolution of Banks and Financial Intermediation: Framing the Analysis


Cetorelli, Nicola, Mandel, Benjamin H., Mollineaux, Lindsay, Federal Reserve Bank of New York Economic Policy Review


I. INTRODUCTION

While the term "the Great Recession" has been loosely applied to almost every economic downturn in the past twenty years, the crisis of 2007-09 has--more than most recessions--lived up to that name. (1) The crisis has been felt across virtually all economic sectors and in all parts of the world. Still, if its effects have been widespread, its origins were narrower: the crisis had its roots in the financial sector and manifested itself first through disruptions in the system of financial intermediation.

This story is in itself not new. Many economic crises in history have been the result of financial crises, and many financial crises in turn originated as failures of financial intermediaries. And in every instance the reference has been to banks, in their essential role as deposit-taking entities involved primarily in the business of lending. Thus, Reinhart and Rogoff (2008) identify some thirty separate instances of banking crises across many countries and at different points in time during the last 100 years.

Indeed, the terms bank and financial intermediary have normally been used interchangeably. However, what was new in this last crisis is that we witnessed many instances of financial intermediation failure that did not necessarily, or at least not directly, result from bank failures. To be sure, many banks did indeed fail during the crisis and many more were left with impaired operations--outcomes that certainly exacerbated the scale and scope of the crisis. Nevertheless, major disruptions occurred among segments of financial intermediation activity that had in recent years been growing rapidly and that did not seem to revolve around the activity and operations of banks.

For instance, we have learned that the crisis originated as a run on the liabilities of issuers of asset-backed commercial paper (ABCP), a short-term funding instrument used to finance asset portfolios of long-term maturities (see, for example, Gorton [2008]; Covitz, Liang, and Suarez [2009]; Acharya, Schnabl, and Suarez [forthcoming]; and Kacperczyk and Schnabl [2010]). In this sense, ABCP issuers (conduits) perform typical financial intermediation functions, but they are not banks. Certainly, in many instances banks were the driving force behind ABCP funding growth, sponsoring conduit activity and providing the needed liquidity and credit enhancements. But the main point is that ABCP financing shifts a component of financial intermediation away from the traditional location--the bank's own balance sheet. Similarly, and concurrently with the ABCP disruptions, financial markets also witnessed a bank-like run on investors that funded their balance sheet through repurchase agreement (repo) transactions, another form of financial intermediation that grew rapidly but did not take place on bank balance sheets (Gorton 2008; Gorton and Metrick 2010). Additionally, in the aftermath of Lehman Brothers' default, money market mutual funds, yet another class of nonbank entities that serve as financial intermediaries, experienced a run on their liabilities, an event that triggered in turn an even bigger run on ABCP issuers (Acharya, Schnabl, and Suarez, forthcoming).

[ILLUSTRATION OMITTED]

The crisis has therefore exposed significant instances of financial intermediation failure but also an apparent disconnect between financial intermediation activity and banks. A new narrative has emerged, describing intermediation as a decentralized rather than a bank-centered system, one in which the matching of the supply of and demand for funds occurs along an extended credit intermediation chain, with specialized markets and nonbank institutions playing a part along the way.

This is the so-called shadow banking model of financial intermediation, as described, for instance, in Pozsar et al. (2010). (2) The authors characterize the transition from a bank-centered to a decentralized model in this way: "In essence, the shadow banking system decomposes the simple process of deposit-funded, hold-to-maturity lending conducted by banks into a more complex, wholesale-funded, securitization-based lending process that involves a range of shadow banks" (p. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Evolution of Banks and Financial Intermediation: Framing the Analysis
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.