Follow the link for the full summary:

https://markusacademy.substack.com/p/modern-financial-intermediation

Link to sign up for the webinar series:

https://markusacademy.substack.com/

On March 19, 2021, Amit Seru joined Markus’ Academy for a talk on his recent work on modern financial intermediation (Buchak et al., 2024). Seru is a Professor of Finance at the Stanford Graduate School of Business, a Senior Fellow at the Hoover Institution and Stanford Institute for Economic Policy Research (SIEPR), and a Research Associate at the National Bureau of Economic Research (NBER).

Highlights:

• The traditional view of banking where deposit taking institutions originate most loans in the economy and keep these loans on their balance sheets is obsolete. The modern view of the intermediation is different and needs to incorporate two major aspects: activity that has migrated to shadow banks and changes to business model of traditional banks.
• Shadow banks have a different business model from banks, where they retain very little and mainly sell to GSEs. 
• Another aspect that is important is how banks and shadow banks fund their activities. Shadow banks finance their activity with much more equity compared to banks.
• Seru proposes that the modern view of intermediation — and regulatory framework around it — needs to consider all these aspects. 
• Modern intermediation viewed this way also allows us to look at shadow bank choices and ask how much lending is possible with much higher capitalization. 
• Regulatory burden/pressure is not just about capital requirements. 
• Modern intermediation also implies a different outlook on the nature of debt relief transmission during periods of distress. 
• In conclusion, views and regulations focused only on bank balance sheets are very incomplete. Assessing financial stability in this modern era involves understanding the business model of shadow banks and traditional banks, the industrial organization of the market and the equilibrium interaction of intermediaries.