Coming Out of the Shadows?

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by Viral Acharya

Regulators face difficult choices about how to regulate shadow banking.  There is much they might learn from the choices made by Depression-era governments.

Shadow banking is a system of financial institutions that mostly look like banks.  These highly leveraged institutions borrow in short-term debt markets and invest in longer-term illiquid assets.  This part of the financial system includes asset-backed commercial paper (ABCP), money market funds, securities lending and collaterialised repos (at broker-dealers).

The size of this market is roughly $800bn in the US alone (and even larger by some estimates) and matches the size of deposits, both insured and uninsured, held at depository institutions.  The growth of shadow banking over the past 25 years has been extraordinary relative to the growth of deposits.

Read the full piece from The Banker

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The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

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