Abstract
The worst economic crises since the great financial distress have still depression aftershocks. Few economists have argued that
irrational exuberance of short-term investors, complex regulatory framework and involvement of banks’ treasuries in financial
wagering are responsible for this incessant financial instability. Another thought of economists has argued that in the
consequences of the internal market process that allowed fragility to build over time is liable for persistent systemic risk. In this
paper, we focus on the shift and expansion of shadow banking system and what consequences are creating to financial fragility.
Engaging with emergent theories of shadow banking, we investigate into its structural role of capital allocation and credit
creation in emerging market. We used annual data during the 2009–2018 period to test the short-term fluctuation and long-term
equilibrium between expansion velocity of shadow banking and financial fragility. Co-integration analysis and ECM are used
to identify the degree of data sensitivity, its deviation from equilibrium in the long-term and the error, influences in its short-run
dynamics. Our results traced long-term equilibrium among four variables of shadow banking as for signs of coefficient. Leasing
companies, investment finance companies and Modaraba are reported positive financial segments that faster the growth of
shadow banking and its consequent higher financial fragility. In line with findings, we argue that shadow banking is seen as the
organic institutional infrastructure of financial system to support debt creation and resilient market-based financing that would
favor balanced economic growth. We proposed novel intervention of financial regulators to improve prudential regulations with
better understanding how financialization could have changed real-financial interactions.
Dr. Ahmad Raza Bilal, Saba Mirza, Dr. Jeremy Philip Brown. (2019) Shadow Banking is Systematic Risk to Financial Fragility: A Myth or Reality?, Paradigms , Vol 13, Special Issue.
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