[INAUDIBLE].
The topic for today is, It's the beginning of,
of the fourth and final section of the course.
and, Fortunately, today, the FT is, is very much in sync with me.
and so on, on the front page here
they have an article, regulators to tackle shadow banking.
and there's been a number of, there's been a report that, that has just come out by
Lord Adair Turner.
the UK regulator of the project and
they're calling for regulation of shadow banking.
This happens to be something that I've been actually actively working on and,
[INAUDIBLE]
on this and I'm going to a conference in two weeks about this, and so, and
I gave a talk on it, actually, just two days ago in a conference in Canada.
So, among the country, and I didn't know what the proposals were.
the important thing to appreciate is that, shadow banking refers to,
money market funding of capital market lending.
So it's very much about the money market.
Okay, and the money market is what we're studying in this class.
In this, in this last section of
the course, what we're essentially doing, is extending
the money view for the money market to the capital market, to the prices of risk.
and so, this is exactly what, what we need to be talking about.
this is the front page article, and it
continues on in the second section, page 19,
with a nice picture of, Lord Adair Turner there, actually.
And and it
[COUGH]
quoting him, saying, shadow banking is like cholesterol.
There is good and there is bad.
so, I sort of like that, because I
personally think that shadow banking is in our future.
and hopefully it will be good shadow banking, not bad
shadow banking, and and so one of my efforts to
make the world a better place is to try to
ensure that it's good shadow banking rather than bad shadow banking.
So on here,
on the bottom, I'm showing something called a traditional bank.
Sometimes I like to call that the Jimmy Stewart bank.
after the famous holiday movie with Jimmy Stewart in it ended a run on his
bank and what you see there is deposits on one side and loans on the asset side.
And this bank is backstopped by the FDIC which in,
which insures the deposits and therefore the solvency of the bank,
in a sense.
And the, the deposits are going to get paid and the the
reserve bank, is the other backstop, which is a liquidity backstop.
So there's a solvency backstop and a liquidity backstop.
That's a traditional bank.
When most economists, in fact most people say
bank okay, to the extent that they have
any balance sheet in their mind that's the
balance sheet that they have in mind, okay.
But this is increasingly not
the way the world is. Okay?
The world is much more like the upper one, okay?
Where I'm showing, residential mortgage backed
securities, that's what RMBS stands for there.
So these mortgages, these loans are packaged
together, and made into, like, a bond, okay?
Which might be tranched, you know?
So that there's a risky tranche, and a, and a risk free tranche.
And then further insured, I'm showing interest rates
swap and a credit defaults swap, and then
funded in the money market with RP, with purchase agreements, with repo, or
with acid backed commercial paper, which is held by Money Market Mutual Funds.
So you can see that there's deposits on one side and there's loans
on the other side, but there's all this sort of stuff in the middle.
and that's what we mean when we're talking about shadow banking.
A shadow bank is, money market funding of capital market lending.
And you can see that. You can see that there.
and in order to understand how shadow banks work, you
need to appreciate that on both sides of the balance sheet
[INAUDIBLE].
The prices that you're dealing with are market prices, okay?
That the money market funding rate, okay which we know a
lot about from, from this course but also the price of risk.
The price of the securities, and so that's where we're going.
We're, we're moving toward thinking about, the price, the price of risk.
Which is these interest rates swaps and credit default swaps.
That is what we are going to be talking about after Thanksgiving.