INTERCONNECTEDNESS BETWEEN SHADOW AND TRADITIONAL BANKING SYSTEMS IN EUROPE

Finansijska kriza koja je izbila u SAD-u se brzo raširila na evropske zemlje, izazivajući snažnu bankarsku krizu i krizu javnog duga. Time je razotkriven značaj kratkoročnog finansiranja za tradicionalne banke, koje je uvećalo njihovu izloženost uslovima na međubankarskom tržištu. Finansijske inovacije, a posebno proces sekjuritizacije, vodile su rastućem značaju različitih institucija koje pripadaju bankarskom sistemu u senci koje obavljaju kreditnu, likvidnosnu i ročnu transformaciju, bez pristupa likvidnosti centralne banke ili nekom drugom obliku garantovane likvidnosti. Evropske banke su preuzele aktivnu ulogu u američkom procesu sekjuritizacije, ali su takođe sekjuritizovale i proizvode sa evropskog tržišta. Autori su koristili raspoložive statističke podatke Evropske centralne banke o bankarstvu u senci, i prema užoj i prema široj definiciji, kako bi analizirali različite mere međuzavisnosti između bankarstva u senci i tradicionalnog bankarskog sistema. Analiza pokazuje da neregulisane finansijske institucije predstavlaju izvor ozbiljnih sistematskih rizika, ne samo zbog veličine, već i zbog jake mreže međuzavisnosti sa regulisanim bankarskim sektorom.


Introduction
The financial crisis highlighted the significant interconnections between traditional and shadow banking entities, which caused the quick spreading of the contagion from unregulated financial institutions to the regulated sector, thus jeopardizing financial stability.The analysis of the development of and risks posed by the shadow banking system, as well as of the mutual connection between traditional and shadow banks and between the US and European shadow banking, is complicated by the lack of adequate data.There is not even a universally accepted definition of the shadow banking system (SBS).The European Central Bank (ECB) accepted the definition proposed by the Financial Stability Board in its 2011 report.The FSB defines the shadow banking system broadly as "the system of credit intermediation that involves entities and activities outside the regular banking system".It also advises regulators to narrow their policy focus to nonbank credit intermediation which raises the systemic risk concern (especially maturity and liquidity transformation, imperfect credit risk transfer and/or leverage), and indications of regulatory arbitrage (FSB, 2011, p. 3).The FED in its report defines the shadow banking system as "a web of specialized financial institutions that channel funding from savers to investors through a range of securitization and secured funding based techniques" (Adrian & Ascraft, 2012, p. 1).The IMF in its Global Financial Stability Report broadly defines shadow banking as: "credit intermediation outside the conventional banking system" (IMF, 2014, p. 66).
The analysis of the evolution in terms of the size and structure of the shadow banking system in the Euro area is challenging.The ECB categorizes the majority of shadow banking activities as other financial intermediaries (OFIs).This category includes all financial institutions except for monetary financial institutions (MFIs represent the regulated banking sector: central banks, credit institutions and money market funds) and insurance corporations and pension funds (ICPFs).This definition includes intermediaries like regulated investment funds (IFs), but excludes money market funds (MMFs) which engage in shadow banking activities (Bakk-Simon et al., 2012, p. 9).A major obstacle in analyzing the development of the shadow banking system is the insufficient granularity of data.The ECB calculates the indicator for shadow banking as the sum of data for "non-monetary financial intermediaries other than insurance corporations and pension funds" (OFIs) and MMFs minus the data for "investment funds other than MMFs".Shadow banks could be further divided into money market funds, financial vehicle corporations (FVCs) and "other miscellaneous" intermediaries.While the ECB monitors the data on the first two types of financial institutions, further granularity for the third category is not available, and those institutions hold more than 70% of the total assets intermediated by shadow banking entities (7.6 trillion EUR) (ECB, 2013, p. 92).
The paper is organized as follows: it first analyzes the development and structure of shadow banking activities in Europe, and then it analyzes the process of financial intermediation carried by shadow bank entities, along with the similarities and differences in relation to the traditional banking sector.Finally, it studies the interconnection channels between the shadow and regulated banking sectors and their influence on systemic risks.

Development and Structure of Shadow Banking System in Europe
The financial sector in the Euro area is bankcentric, since banks provide 75% of financing for the euro economy.Therefore, it is crucial to protect the soundness of the banks' balance sheets in order to maintain their lending activities to the economy and have them meet the investment and consumption demand (Popović, 2016, p. 225).The European banks are universal, which means they perform both commercial banking and investment banking activities, and provide other financial services like insurance.They integrate traditional financial intermediation with market and securitized intermediation (Jeffers & Plihon, 2013).The process of European integration and introduction of common currency led to the intensified bank expansions abroad and also to a number of bank mergers in the Eurozone.Financial deregulation in the Popović S., Janković I., Lukić V. Interconnectedness between shadow and traditional banking systems in Europe evropskog bankarskog sistema, pogotovu tokom 2000-ih.Finansijalizacija evropskih banaka je prouzrokovala promene u modelu univerzalne banke, porastao je udeo aktivnosti investicionog bankarstva u odnosu na tradicionalne bankarske poslove.Evropske banke su se sve više okretale prema ritejl poslovima u međunarodnim okvirima, i počele su da investiraju u finansijske derivate i raznorodne kompleksne hartije od vrednosti.Značaj hartija od vrednosti je porastao i na strani aktive i pasive, a banke su počele da se više oslanjaju na tržišne izvore finansiranja i uvećale su svoj tržišni portfolio.Finansijalizacija banaka u Evropi je pospešila razvoj bankarstva u senci.Deregulacija i evropska integracija su zaoštrile konkurenciju između banaka, kao i banaka i ostalih finansijskih institucija.Tradicionalne banke koje su se isticale na domaćem tržištu, nisu bile dovoljno velike da se nametnu i na većem EU tržištu.To je pokrenulo proces restrukturiranja u bankarskom sektoru.Banke su bile primorane da rastu.Period između kraja 1990-ih i ranih 2000-ih je bio period intenzivnih bankarskih merdžera i akvizicija (što je bilo u skladu sa globalnim trendom rasta M&As).Banke iz SAD-a su ravile poslovanje u Evropi i ušle su u procese akvizicije i poslovne alijanse sa evropskim institucijama.Spajanja američkih investicionih banaka i drugih kompanija fokusiranih na poslove sa hartijama od vrednosti sa evropskim institucijama su dodatno pojačali konkurentske pritiske na banke iz EU, kako u njihovim tradicionalnim poslovima tako i u poslovima investicionog bankarstva i upravljanju imovinom.Period niskih kamatnih stopa je pokrenuo trku za profitom i usmeravanje plasmana ka rizičnijim privatnim zajmotražiocima (ECB, 1999).Takođe, banke su težile ka nekamatnim izvorima prihoda, npr.iz oblasti osiguranja (bankoosiguranje je glavni distribucioni kanal za proizvode životnog osiguranja u Evropi) (Popović et al., 2017).Sve ovo je pojačalo aktivnosti banaka na tržištu i podstaklo razvoj BSS-a u Evropi.On nije odvojen od tradicionalnog bankarskog sistema, već postoji jaka međupovezanost između njih.Slika 1. prikazuje promene u strukturi evropskog finansijskog sektora koje se opažaju iz promena u učešćima različitih institucija u ukupnoj aktivi sektora.Uočava se trend opadanja udela MFIs i rastući udeo OFIs od 2000.godine.Tako su OFIs povećale svoj udeo sa 16,5% u 2000.godini na 29% u 2008.godini u kojoj je izbila i kriza u evrozoni, a rast udela je nastavljen i u narednim godinama sve do 39% u 2015.godini.U istom periodu udeo kreditnih institucija je opao sa 62,9% na 47,6%.Na slici 2. se porede ukupna imovina bankarskog sektora i BSS-a.Slika uključuje širu i užu meru veličine BSS-a.Šira mera obuhvata MMFs, investicione fondove izuzev MMFs, FVCs i ostale OFIs (prema metodologiji ECB, 2016 i European System Risk Board, 2016, str.14).Uža mera se obračunava kao razlika šire mere i investicionih fondova, jer se radi o regulisanim subjektima sa izuzetkom hedž fondova, a regulisani subjekti ne bi trebalo da se tretiraju kao deo BSS-a (Bakk-Simon et al., 2012, str.20).Šira mera uključuje sve finansijske posrednike koji su uključeni u aktivnosti bankarstva u senci, nastojeći da obuhvati sve oblike kreditne intermedijacije koji se odvijaju mimo poslovnih banaka, ali se time ipak precenjuje veličina BSS-a (Deutsche Bundesbank, 2014, str.European Union started during the 1980s and was accelerated during the 1990s by the creation of the common market for financial and banking services.According to Jeffers and Plihon (2013, p. 7), the consequence of intensive financial deregulation was the financialization of European banking systems, especially during the 2000s.Financialization of European banks caused some changes in the universal banking model, when the share of investment banking activities rose significantly in comparison to traditional banking business.The European banks increasingly engaged in retail business at the international level, and started to invest in derivatives and different complex securities.The importance of securities increased both on assets and liabilities side, and the banks started to rely more on market-based sources of financing and increased their market portfolio.The financialization of banks in Europe facilitated the development of shadow banking.Deregulation and European integration intensified the competition among banks and between banks and other financial institutions.Traditional banks, which were large players on their national markets, became insufficiently big for the competition at the significantly larger EU market.That caused the restructuring process in the banking sector.Banks had to increase their size.The late 1990s and early 2000s was the period of intensive bank mergers and acquisitions (which was in line with the rising global M&A trend).The US banks developed their business in Europe as well, along with the process of acquisitions and business alliances with the European institutions.The mergers of the US investment banks or securities-oriented companies with some European institutions further increased the competitive pressures on the EU banks, not only in their traditional business, but also regarding the investment banking activities and asset management.The period of low interest rates caused the race for profit, and shift of investments to riskier private debtors (ECB, 1999).Moreover, the banks sought for non-interest revenues, for instance from insurance activities (bancassurance is the main distribution channel for life insurance products in Europe) (Popovic et al., 2017).All of the above facilitated the banks' market activities and, thus, the rise of shadow banking in Europe.The shadow banking system in Europe is not separated from the traditional banking system; instead, there is a strong interconnection between them.
Graph 1 depicts the changes in the structure of the European financial sectors according to the different institutions' shares in total assets holdings at the sector level.Since 2000 there has been a decreasing trend in the share of MFIs, and an increasing share of OFIs.The OFIs sector increased its share from 16.5% in 2000 to 29% in 2008 when the crisis in the Eurozone emerged, and continued to increase its share of total assets in the following years, to up to 39% in 2015.In the same period the share of credit institutions fell from 62.9% to 47.6%.Aktiva kojom upravljaju subjekti BSS-a, i prema širem i prema užem pristupu, raste u kontinuitetu, sa izuzetkom 2008.god.BSS prema širem pristupu je krajem 2015.godine raspolagao imovinom koja je po obimu bila ravna imovini bankarskog sektora.Ovaj rast su predvodili investicioni fondovi uz isključenje MMFs i sektor ostalih OFIs, čija imovina se uvećala više od tri i po puta.Imovina bankarskog sektora se više nego udvostručila u periodu od 1999.god.pa sve do izbijanja krize, ali od tada se primećuje opadajući trend.Zbog svega toga može se konstatovati da se struktura finansijskog sektora u evrozoni bitno promenila od 2008.godine, i da je udeo MFIs opao relativno u odnosu na udeo OFIs.
Analyzing the importance of the financial intermediation process carried out by financial institutions other than banks, requires the analysis of the liabilities and claims of nonbank financial intermediaries vis-a-vis the non-financial private sector.Graph 3 shows the structure of the source of finance provided to non-financial corporations in the Euro area, by instrument and by type of financial institutions.OFIs, investicioni fondovi imaju najveći značaj kao kupci dužničkih hartja od vrednosti i akcija kompanija (32,6% i 57,2% respektivno, dok je njihova uloga u odobravanju kredita marginalna).U razmatranom periodu ističe se pad udela finansijskih instrumenata u posedu MFIs u odnosu na udeo ostalih finansijskih institucija.
Banke povezuju poverioce i dužnike preko svojih depozitno-kreditnih poslova: The left part of Graph 3 shows the share in the total amount of financing provided by the Euro area financial sector to non-financial corporations (NFCs) in 2015.The funds from monetary financial institutions accounted for more than a half of the external financing of NFCs.The loans to NFCs were mostly granted by banks (73% of total loans granted to NFCs), but they also bought around 20% of debt securities and slightly less than 10% of quoted shares of NFCs (right part of the graph).Although bank loans still remain the main source of financing provided by the Euro area financial sector to NFCs, their share has been slowly decreasing in favor of other sources.The financial crisis caused the net flow of loans from MFIs to decline and even turn negative in 2009 and 2010, and again from 2012-2014, as a consequence of the bank and debt crisis and the subsequent recession (ECB, 2016, p. 9).Other flows of funding remained positive in the period of crisis.The share of funds provided to NFCs by the broadly defined shadow banking system in 2015 was almost 37%.The SBS provided around 26% of total loans granted to NFCs in that year, having purchased almost 39% of issued debt securities (41.5% of debt securities were bought by insurance corporations and pension funds) and almost 80% of quoted shares (12.3% of quoted shares bought ICPFs).Among the broadly defined OFIs, investment funds have the greatest importance as buyers of companies' debts and shares (32.6% and 57.2% respectively, whereas their role in providing loans is insignificant).In the reporting period there has been a decline in the share of observed instruments held by MFIs relative to other financial institutions.
Another characteristic of the shadow banking system in the European Monetary Union is large heterogeneity in terms of its size and structure among the member countries.Shadow banking entities in Luxemburg and Netherlands hold more than 60% of assets held by the SBS in the Euro area.Together with the shadow banks from Ireland, France and Italy, that share is almost 85%.
In Luxemburg, Netherlands, Ireland, Malta and Cyprus shadow bank entities hold a significantly larger amount of assets than traditional banks.According to the ECB (2013, p. 89) this is the result of a specific specialization in the non-traditional banking activities in those countries, not so much of the domestic demand for this type of financial intermediation.Corporations from other countries use financial vehicles located in these countries due to the more favorable conditions for performing certain financial services.

Similarities and Differences between Traditional and Shadow Banking System in the Process of Financial Intermediation
Borrowing and lending is an important feature of every economy.Individuals and companies use loans to finance their business and everyday activities.The borrowing and lending activities can be in the form of direct or indirect financing.In indirect financing, financial resources are channeled from lenders to borrowers through an intermediary, a bank or another financial institution.The predominant amount of loans is available through the traditional banking system.The traditional banking system includes commercial banks, savings and loan associations, credit unions, and savings banks.
The process of lending often includes liquidity, maturity and currency transformation of financial resources.Based on liquid demand deposits, banks are able to grant loans with longer maturity.Qualitatively speaking, this is essentially a maturity and liquidity transformation of financial resources.However, banks are specialized in assessing the borrowers' creditworthiness and monitoring the granted loans.Thereby, they offer diversification benefits to depositors (Noeth, 2012, p. 2).
While transforming deposits into loans traditional banks are supervised by the central bank authority.They are obliged to maintain the predefined level of reserves with the central bank.Banks are required to hold a certain level of capital as a protection against losses.In addition, deposits are often a part of the pre-specified deposit insurance schemes.Banks that need short-term liquidity injections can borrow from the central bank through the discount window or open market operations.Finally, in times of distress, the central bank plays the role of the lender of the last resort for affected banks.All of the stated safety measures are aimed at the stability of the banking system, prevention of the bank runs and soundness of the overall financial system.Besides the traditional banks, in the financial markets nowadays there is a parallel, shadow banking system, which provides similar activities as a banking sector but through other specialized financial institutions.These are financial intermediaries that are different from banks.They operate beyond the system of regulation placed on traditional banks.Since regulation is costly, these institutions use the so-called regulatory arbitrage.They bypass the regulation imposed to traditional banks.
Shadow banks are also part of the indirect financing.They channel financial resources from surplus holders to deficit facing entities.Nevertheless, this process of financial resources transfer is more complex.In this scheme of financing, borrowers still communicate to and get loans from financial institutions (mortgages, student loans, car loans, etc.).But these loans are not funded by deposits.Instead, they are usually funded by repo agreements and money market mutual funds.These resources are usually very liquid and short term, so in a way similar to bank deposits.The loan provider pools and sells the loan to another institution.Then the securitization process starts (Kodres, 2013, p. 42).Based on the pool of loans new securities are issued in several stages.They are sold to various investors from individuals to institutional ones, including investment and hedge funds.In addition, banks buy them, too.Investors are paid interest on their investment based on the underlying pools' loan payments.The value of the derived securities is also based on the value of the underlying pool of loans.Finally, the derived instruments lose value if there is a default on loan repayment, or in the case of the debtor's bankruptcy.
The securitization process is organized through financial institutions such as financial holding companies, investment banks and government sponsored entities.Although it may seem that in the stable times shadow banking reduces transaction costs for investors, it basically does not offer any kind of protection for the invested money.This makes this system more prone to panic runs.In this system, instead of deposits withdrawal, there is a shortage of shortterm funding in the periods of instability.When the funding is cut off, or the underlying loans become non-performing, the whole structure of derived instruments becomes worthless.Ultimately, investors bear the greatest losses.
Traditional and shadow banks bring borrowers and lenders together.They finance their activities with short-term resources based on which they provide longer-term, less liquid loans.In the process, the activities of shadow banks are more complex, often vague and the system is incomparably less regulated.This is why the system has already caused and, if not put under stronger supervision, will continue to cause massive defaults of both shadow banks and investors in the future.
ESRB (2016, str.16) analizira međuzavisnost kreditnih institucija i subjekata koji predstavljaju BSS prema široj meri (OFIs i IFs) na osnovu sledećih indikatora-kreditna izloženost banaka prema institucijama bankarstva u senci i zavisnost kreditnih institucija od depozita subjekata BSS-a i obrnuto.Oko 8% ukupne imovine kreditnih institucija u evrozoni predstavljaju krediti odobreni subjektima BSS-a, investicije u njihove dužničke hartije od vrednosti, akcijski kapital i investicione jedinice investicionih fondova (Slika 5.) Udeo kredita MFIs odobrenih BSS-u (finansijske institucije bez MFIs, osiguravajućih kompanija i penzionih fondova) ispoljava uzlazni trend, kao što se može opaziti na slici 5. U 2013. godini krediti odobreni BSS-u su iznosili oko 3,7% bankarske aktive (1,21 biliona evra), da bi od tada njihov udeo nešto pao, i na kraju se ustalio na nivou od 3% bankarske aktive.Investicije u kratkoročne i dugoročne hartije od between the shadow and traditional banking systems.It is a precondition for the creation of international standards to prevent financial contagion and avoid risk concentration.Systemic risk does not exist just because of the size of the shadow banking sector, but also because of the strong linkages between traditional and shadow bank entities.There are different direct and indirect channels of connections among them.According to the FSB (2011b, p. 4-5) direct linkages exist because: banks are often a part of the shadow banking credit intermediation chain, they provide explicit or implicit financial support to the SBS, invest in financial products issued by the SBS and grant loans to them and vice versa.Banks can also be the owners of shadow banking entities like finance companies and broker-dealers (FSB, 2012, p. 20).Indirect links are realized through the market channel, given that both groups of entities can invest in similar assets (securitized products) and have common counterparties, use similar business models, common accounting practices, and one should also take into account the information flows and market perception of coincident financial market stress (ECB, 2015, p. 8-9).
The IMF (Aregui et al. 2013, p. 6) suggests the two sets of measures that regulators can use to identify systemic risk stemming from interconnectedness, i.e. network analysis and market (price)-based measures.Network analysis helps identify the core elements in the complex web of relations among the different financial institutions and thus further investigate the level of exposure and assessment of direct risk transmission.Thus, the first step in this analysis is the measurement of mutual exposures among the financial institutions.Unfortunately, such comprehensive analysis of different interconnection channels in Europe is limited by the lack of adequate data.For instance, the data concerning the direct mutual exposure of different financial institutions are available only since 2014.Also, the ECB in its MFIs balance sheet statistics does not provide a breakdown of "Other Residence Sector" into sufficiently long time series.It consists of institutional units located in the Euro area, other than MFIs and entities belonging to the "General Government" sector: "Other Financial Intermediaries (OFIs) and Financial Auxiliaries", "Insurance Corporations and Pension Funds", "Non-Financial Corporations" and "Households" (ECB, 2007, p. 9).Moreover, the OFIs data available in the ECB statistics should be interpreted with care, since there is no full coverage of different financial instruments and institutions, and some data are the result of the calculations based on the available accounts data.Market-based measures of systemic risk use the prices of assets like stocks, bonds, derivatives or credit default swap prices, to assess the interconnectedness arising from both direct and indirect spillover channels (interdependence of the financial positions of financial institutions).Unfortunately, such information is not available for a significant part of the European financial sector, and also such measures capture mainly the market perception of risk that does not fully reflect the default probability of the concerned institution.
The ECB and other regulators continuously work on information limitations, so in the future deeper granularity of data could be expected.That would enable a comprehensive analysis of the interconnectedness dimension of systemic risk in Europe, but also in the rest of the world.
Ukupna direktna obostrana izloženost evropskih finansijskih institucija je prikazana na slici 6. Izloženost BSS-a prema MFIs-u je veća nego u obrnutnom slučaju, što je naročito slučaj sa investicionim fondovima sa tržišta novca, i oni investiraju uglavnom u dužničke hartije od vrednosti kreditnih institucija (oko 70% njihove aktive).Izloženost investicionih fondova koji investiraju u obveznice i hedž fondova prema MFIs-u je 11% i 8% respektivno (ESRB, 2016, str.6).The share of loans MFIs granted to the SBS (financial corporations except for MFIs and the ICPFs sector) has had an increasing trend, as shown on Graph 5.In 2013 loans to the SBS amounted to around 3.7% of bank assets (1.21 trillion euros), and despite a slight decline since then, these loans still remain at a high levelaround 3% of bank assets.The holdings of shortand long-term debt securities issued by the OFIs sector are larger, in 2013 almost reaching 4% of bank assets, and having fallen to 3.35% in Q3 2016 (a drop from 1.21 to 1.05 trillion EUR).The MFIs investments into listed shares and investment fund units issued by OFIs recorded a constant rise in the observed period, although in both absolute and relative terms they account for a smaller proportion of bank assets, i.e. around 0.8%.The deposits from the SBS institutions with the MFIs are higher, and account for slightly less than 6% of the MFIs liabilities.The maximum was reached during 2011 (2.32 trillion EUR, slightly above 7% of total liabilities), and there has been a slight drop since.A half of these deposits have maturity below 1 year.

Zaključna razmatranja
Finansijske institucije koje ulaze u sastav bankarskog sistema u senci u Evropi su izvor visokog sistematskog rizika, ne samo zbog svoje veličine, već i zbog veoma složenih veza sa drugim finansijskim institucijama, kao i zbog The interconnectedness in the European financial sector could be analyzed not just through the direct mutual exposure at the European level, but also across individual countries and their exposure to the financial sectors located in the same and in other Euro area countries.Besides, it is important to examine the interconnectedness arising from the exposures to common assets.According to the Report on Financial Structures (2016, p. 13-18), the largest exposure of MFIs is in the 4 largest EMU economies -Germany, France, Italy and Spain, most of which refers to the exposure towards other domestic MFIs.Their exposure to domestic OFIs is also very high, especially in Spain where it is higher than the exposure to domestic MFIs.In Germany and France domestic credit institutions invested sizable amounts into the credit institutions and OFIs from other EMU countries.The country with the highest exposure of domestic credit institutions towards domestic OFIs is the Netherlands (around 85%).OFIs in Austria, Luxemburg, Malta, Germany, France and Ireland are mostly exposed towards domestic and other Euro area OFIs.Equally important is the level of their exposure to the MFIs sector.
The analyzed indicators show that the linkages between various types of financial institutions in Europe have been growing, especially the exposures towards shadow bank entities.Also, the analysis has shown that there is a mild trend of substituting the financing of nonfinancial corporations by banks with the financing via other financial institutions.

Graph 2
compares the total amount of assets held by the banks and the SBS.The Graph includes both broad and narrow measure of the SBS size.The broad measure comprises the MMFs, investment funds without the MMFs, FVCs and other OFIs (according to the methodology applied by the ECB, 2016 and the European Systemic Risk Board, 2016, p. 14).The narrow measure is calculated as the broad measure without investment funds, since they are regulated entities, with the exception of hedge funds, and regulated entities should not be considered as part of the shadow banking system (Bakk-Simon et al., 2012, p. 20).The broad measure includes all financial intermediaries Graph 1.The share of different financial institutions in total assets of the Euro area financial sector Source: ECB.2016.Report on Financial Structures, October.Frankfurt am Main, p. 57-58; Authors' calculation based on the data from: ECB.2002.Report on Financial Structures.Frankfurt am Main, p. 17 Popović S., Janković I., Lukić V. Interconnectedness between shadow and traditional banking systems in Europe 19 Bankarstvo, 2017, Vol.46, Issue 3

Graph 2 .
Banks' vs. SBS assets in the Euro area Source: ECB.2016.Report on Financial Structures, October.Frankfurt am Main; Deutsche Bundesbank.2014.Monthly Report, March, p. 20 Graph 3. Role of financial institutions in financing non-financial corporations in the Euro area, by instrument Source: ECB.2016.Report on Financial Structures, October.Frankfurt am Main

Graph 6 .
Direct mutual exposure of the Euro area financial sector, per type of instrument, Q3 2016 Source: Authors' calculations based on the data from: ECB, SHS, BSI statistics, Statistical Data Warehouse and ECB.2016.Report on Financial Structures, October, p. 13 3ankarstvo, 2017, vol.46, br.330The largest borrowers are MFIs, and the largest portion of these loans is granted to other MFIs (around 82% or 5.4 trillion EUR), while loans to OFIs account for 15% of total loans (935 billion EUR).The second largest lender is the OFIs sector.Around 74% of their loans is granted to MFIs (around 2.2 trillion EUR) and close to 25% to other OFIs.ICPFs do not have a significant role in granting loans to other financial institutions.The largest holder of listed shares and investment funds' units is the ICPFs sector.Its total investments in these securities in Q3-2016 amounted to 2.744 trillion EUR and most of that (almost 98.1%) was invested in investment funds' shares.Around 2.54 trillion EUR (or 95%) was placed in the IFs units issued by OFIs.Investments in listed shares and IFs units issued by MFIs amounted to around 142 billion EUR (or around 5.2% of the total ICPFs portfolio of listed shares and IFs units).OFIs are very exposed to the same sector.Their total exposure to the listed shares and IFs units is around 1.964 trillion EUR, and 83% of that is investments in other OFIs, most of which are in the IFs shares (almost 1.47 trillion EUR).Investments in the listed shares and IFs units issued by MFIs are around 278.5 billion EUR (or 14.2%).MFIs are also significantly exposed towards OFIs, given that out of their total investments in the listed shares and IFs units amounting to about 350 billion EUR, slightly above 71% is accounted for by the investments in the shares and IFs units issued by the OFIs sector, and around 26% by the investments in the shares and IFs units issued by other MFIs.The largest holder of debt securities issued by financial institutions is the MFIs sectoraround 2.65 trillion EUR.Around 60% of that is accounted for by short-and long-term securities issued by other MFIs, and close to 40% by those issued by the OFIs sector.Short-term and longterm MFIs securities are very attractive for other financial sectors as well, hence around 51% of all debt securities owned by OFIs and around 63% of all debt securities owned by ICPFs are the ones issued by MFIs.