Shadow Banking: March 2011 Archives

No need to fear the shadows

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by Roy C. Smith

With the big banks under the boot of the regulators, tucked up with tougher capital ratios, trading restrictions and deferred incentives to rein in recklessness, some bank chief executives and academics have called for similar restrictions on the "non-bank monsters" of the shadow banking system where dangerous, unregulated risks are said still to reside.

A shadow banker is anyone who participates in the lending of money or its near equivalent. These would include financial intermediaries, off-balance-sheet investment vehicles and hedge funds, as well as institutional asset managers.

Altogether, global institutional investors managed about $150 trillion of securities and derivatives in 2009, compared with about $95 trillion for all banks.

But the idea that the next meltdown will occur in the widely distributed shadow banking sector is nonsense, now that its riskier aspects have been addressed.

The five systemically important US non-bank intermediaries - investment banks - were dissolved by the crisis: Lehman Brothers failed, large banks acquired Bear Stearns and Merrill Lynch, and Morgan Stanley and Goldman Sachs turned themselves into banks. The Federal Reserve now regulates them all.

Read the full opinion editorial on

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


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).

About the Authors