Shadow Banks and the Collateral Multiplier.

Area of Science:

• Economics
• Macroeconomics
• Financial Markets

Background:

• Traditional banking and shadow banking systems play distinct roles in intermediating sovereign debt.
• Government bonds are central assets in both traditional and shadow banking frameworks.
• Existing models often overlook the specific mechanisms within shadow banking.

Purpose of the Study:

• To introduce and define the collateral multiplier as a measure for shadow banking activity.
• To compare the collateral multiplier with the traditional money multiplier.
• To analyze the transmission of monetary policy through shadow banks and understand market turmoil.

Main Methods:

• Development of a simplified framework comparing traditional and shadow banking.
• Definition of the collateral multiplier as the ratio of dealer banks' matched book repo activity to their trading book.
• Empirical estimation using the New York Fed's Primary Dealer Statistics data for US Treasury repo collateral.

Main Results:

• The collateral multiplier quantifies shadow banking's capacity to intermediate sovereign debt via shadow money creation.
• Empirical estimation provides insights into the reuse of sovereign debt as collateral.
• The study quantifies the collateral multiplier for US Treasury repo collateral.

Conclusions:

• The collateral multiplier offers a novel perspective on shadow banking's role in sovereign debt intermediation.
• Findings illuminate monetary policy transmission channels via shadow banks.
• The research provides context for understanding market turmoil, such as the March 2020 COVID-19 induced events.