Monetary Policy and Shadow Banking: Trapped between a Rock and a Hard Place

In this paper, I collect data on the euro area shadow banking system and demonstrate that tightening of monetary policy conditions in the run-up to the global financial crisis successfully reduced the growth of traditional banking but strengthened the growth of shadow banking due to a general escape from high funding costs. After the crisis, when interest rates were depressed to all-time lows, the empirical link between monetary policy and traditional banking was significantly weakened, while the relationship with shadow banking turned from positive to negative, i.e., the post-crisis monetary easing is found to have caused massive inflows into investment funds as a result of search for yield induced by persistently low interest rates.

JEL codes: E52, G21, G23

Keywords: Interactions, monetary policy, shadow banking, traditional banking

Issued: December 2019

Download: CNB WP No. 5/2019 (pdf, 443 kB)