Commercial Banking and Shadow Banking

Abstract

We review in this chapter the market developments related to the increasing blurring of the boundaries between banks and financial markets, and the literature associated with this. While traditionally viewed as competitors, institutions and markets are now viewed as engaging in three forms of interaction: competition, complementarity, and co-evolution. The blurring boundaries between banks and markets are evidenced by the growth in shadow banking and P2P lending. We discuss how this has led to economic gains as banks become increasingly dependent on and intertwined with markets. But we also point to a dark side of this intertwining, which is the consequent increase in systemic risk and financial institution fragility. The increased importance of “gatekeepers,” like credit rating agencies, and the implications of these developments for the regulation of banks and markets, are also discussed.