European Banks Shadow Banking in US: (Back to School)


European Parliament President Martin Schulz made the following statement in reaction to the European Central Bank‘s decision to initiate the Outright Monetary Transactions programme to lower high borrowing costs of some euro zone countries:

“I welcome the European Central Bank’s decision to launch a programme of sovereign bond purchases under strict conditionality.

This courageous decision is a major step towards resolving the sovereign debt crisis and restoring the stability of the euro zone.

The ECB decision must not be treated as panacea. Its implementation must be accompanied by an active strategy for growth and jobs as well as sound fiscal policies and structural reforms.

A failure to resolve the euro zone’s economic problems will throw more and more people into poverty and undermine their confidence in the European Union.

Just saw it today Gold $1692, WTI crude $94.87, DXY 81.09 and Euro$ 1.2634. Don’t think ECB changed the world. It is business as usual. ??

In the mean while Came across a very nice paper prepared by Hyun Song shin titled global banking glut and loan risk premium.

The paper describes how the European banks intermediate the US dollar funds and influenced the credit conditions in US.  Hyung Song suggested that the culprit for the easy credit conditions in US up to 2007 may have been “Global Banking glut” rather than the “Global saving glut

The paper is based on the hypothesis that the cross border banking and the fluctuating leverage of the global banks are the channels through which permissive financial conditions are transmitted globally, focusing on the impact of global liquidity on advanced economies.

The gross capital inflows to the United States represent lending by foreign (mainly European) banks via the shadow banking system through the purchase of private label mortgage-backed securities and structured products generated by the securitization of claims on US borrowers. In this way, European banks may have played a pivotal role in influencing credit conditions in the United States by providing US dollar intermediation capacity.

Comparatively Euro zone had a roughly balanced current account while the UK is actually a deficit country.

The Paper also provides an opportunity to study why it was Europe that saw rapid increase in banking capacity and why did European (and not US) banks expand intermediation between US borrowers and savers?

The conclusion ends with a remark and a question why the European banks expanded so rapidly in the decade beginning in 1999.Introdution of the EURO lead to free-floating of money (bank liabilities) in the euro zone across borders but the asset size remained stubbornly local and immobile.

Link to the source paper.


2 thoughts on “European Banks Shadow Banking in US: (Back to School)

  1. Reblogged this on kraigblog and commented:
    Still no Euro- bonds or return of interest rates to euro zone members control. Where would the USA be if it had to rely only on state debt? Would there be investment in California?


    1. Investment in California ? trust I do not know .. there is lot of political movement happening in US to these days


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