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The rise of Shadow Banking Money in the digital Age The Future of Money Frankfurt, 24. Nov 2018 Jonathan McMillan

The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Fractional actional Res eser erve ve Ba Banking king is is fragil gile Source: Bundesarchiv, Bild 102-12023 / Georg Pahl / CC-BY-SA 3.0 The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Frag agility ility ca call lls s for Ba Banking king reg egula lation tion Fragil ile e Business ss Model del Privile leges ges Const nstraints raints Moral l (e.g. .g. pub ublic c (e.g. .g. capital al hazar ard gua uarant ntees) es) requi uire reme ments) nts) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Bu But wa wait it, what t abo bout ut MBS BS,CDO,C ,CDO,CDS,REPO DS,REPO & & CO Source: Unknown (from https://assets.nerdwallet.com/blog/wp-content/uploads/2017/02/Bookkeeper-and-teller.jpg) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Wel elco come me to Mode dern rn Fin inanc ance Source: Pozsar et al. (2010) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e sig ignatur ature e pr product duct of the e fin inancial ncial cr cris isis is of 20 2008 08 Ultim imat ate Ultim imat ate Borrower er Lender Source: Pozsar (2010) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e sig ignatur ature e pr product duct of the e fin inancial ncial cr cris isis is of 20 2008 08 Ultim imat ate Ultim imat ate Borrower er Lender Source: Pozsar (2010) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e Ris ise e of Sh Shado dow w Ba Banking king Ultim imat ate Ultim imat ate Borrower er Lender The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Sh Shadow dow ba banking king is is im impo portant ant Source: McMillan (2014), based on Adrian, Covitz, and Nellie (2014) and Federal Reserve Fund of Flows Data The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Bu But, , why so co compl mplicat icated? ed? Borrower ers Lenders Source: Pozsar et al. (2010) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

It’s the regulation, stupid! Fragil ile e Business ss Model del Privile leges ges Const nstraints raints Moral l (e.g. .g. pub ublic c (e.g. .g. capital al hazar ard gua uarant ntees) es) requi uire reme ments) nts) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

It’s the regulation, stupid! Fragil ile e Business ss Model del Privile leges ges Const nstraints raints Moral l (e.g. .g. pub ublic c (e.g. .g. capital al hazar ard gua uarant ntees) es) requi uire reme ments) nts) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Reg egulating lating ba banks ks in in the e in indu dustri trial al age ge Bank Borrower ers Lenders The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Regulating banks in the digital age? Difficult … Bank Borrower ers Lenders The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

… really difficult Bank Borrower ers Lenders The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

… actually, impossible Borrower ers Lenders Source: Pozsar et al. (2010) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Narrow ow ba banke nkers s run in into o the e same me pr problem blem as reg egulat lator ors Photo: Valerie Hinojosa (CC BY-SA 2.0) The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Narrow ow Ba Banking king in in the e di digi gital al age ge Photo: Composita, CC0 Creative Commons The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e Sy System emic ic So Solv lven ency cy Rule le The value of the real assets of a company has to be greater or equal to the value of the company’s liabilities in the worst financial state The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e Sy System emic ic So Solv lven ency cy Rule le Non on-financ inancial ial com ompanies anies The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e Sy System emic ic So Solv lven ency cy Rule le Non on-financ inancial ial com ompanies anies Financia ancial l compa panies nies - Mut utua ual Fun unds ds - P2P Lendin ending g Platform orms The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e Sy System emic ic So Solv lven ency cy Rule le Non on-financ inancial ial com ompanies anies Financia ancial l compa panies nies - Mut utua ual Fun unds ds - P2P Lendin ending g Platform orms - Bankin king g Inst stitu tuti tion ons The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e End d of Ba Banki king ng – The e Bo Book What is it about ut? The End of Banking distinguishes itself from other books about the financial crisis of 2007 – 08 in several ways. First, it reveals the fundamental financial techniques that are common to all forms of banking — whether it is performed by medieval goldsmiths or by today’s managers at investment banks. Second, it offers a lucid and accessible account of shadow banking. Third, and most importantly, The End of Banking does not rehash the same old regulatory patches or radical reform proposals from the past. Instead, it elaborates a new and intuitive idea of how to adapt the financial system to the digital age. The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

The e End d of Ba Banki king ng – The e Bo Book What ot others think k about ut it: «An interesting and challenging vision» (Vítor Constâncio, Vice-President of the European Central Bank) «An important book about finance» (Reuters Breakingviews, Dominic Elliott) «An absolutely new perspective» (Financial Times Alphaville, Izabella Kaminska) «This thought-provoking book makes radical proposals that strike at the source of fragility in banking and which should be considered seriously.» (Anat R. Admati, Professor of Finance and Economics, Stanford Graduate School) «The End of Banking is easily the ‘deepest’ examination of our financial system in a generation.» (Robert C. Hockett, Professor of Law, Cornell University) «In this book, McMillan embraces the digital revolution and shows, clearly and compellingly, how it can be used to create a financial system that is much better, much simpler and much fairer. Read it urgently and dare to think big.» (William R. White, Chairman of the Economic and Development Review Committee at the OECD) Find out more on www.endofbanking.org The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking

Imp mpre ressu ssum Dr. Jürg Müller Neue Zürcher Zeitung NZZ Falkenstrasse 11 Postfach 8021 Zürich +41 44 258 10 40 juerg.mueller@nzz.ch www.endofbanking.org Twitter: @muellerjuerg Twitter: @EndOfBanking The Future of Money, Frankfurt www.endofbanking.org @EndOfBanking