Research Handbook on Shadow Banking
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Research Handbook on Shadow Banking

Legal and Regulatory Aspects

Edited by Iris H.-Y. Chiu and Iain G. MacNeil

Research Handbook on Shadow Banking brings together a range of international experts to discuss shadow banking activities, the purposes they serve, the risks they pose to the financial system and implications for regulators and the regulatory perimeter. Including discussions specific to the UK, European Union, US, China and Singapore, this book offers high level and theoretical perspectives on shadow banking and regulatory risks, as well as more detailed explorations of specific markets in shadow banking.
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Chapter 5: Pushing shadow banking into the light: reforming the US tri-party repo market

Christian Johnson

Abstract

The US tri-party repo market is one of the most active and liquid in global capital markets. Even more specialized than traditional repo, tri-party repo has often operated in the shadows of global finance. The US Federal Reserve, however, has helped make this market more transparent and less volatile than it has been in the past. This chapter discusses the history, size and characteristics of the US tri-party repo market. It then discusses the need for these changes and the current status of this important shadow banking product after many of these reforms have taken place. In particular, it also discusses the systemic risks both before and after the reforms to global financial markets. This reform process could also help serve as an important model for future reforms to other areas of shadow banking. Repo is often held up as one of the pillars of shadow banking, creating ‘additional sources of funding and offers investors’ alternatives to bank deposits’. Also, repo is often grouped with other shadow banking activities such as securitization and securities lending. These activities are accused of operating in the shadows of the banking system because the transactions themselves, and often the entities that enter them, typically are not subject to traditional banking regulation and disclosure requirements. Tri-party repo is often held up as particularly worrisome owing to the financial leverage that it can create and the possibility of runs on the shadow banking system during times of market stress.

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