It’s the most important capital market in the global financial machine, the shadow banking layer, the international waters where institutions … Shadow banking emerged in the regulated banking system in the 1980s and 1990s when the traditional banking model became outmoded. The shadow banking system is a name for the non-bank financial institutions that have played increasingly large roles in lending the money that the financial system depends upon to function. Unscrutinized leveraged lending swells in the dark. The bad news is … Banking regulators encouraged shadow banking as the only way to preserve banks as viable entities in the financial system. Shadow banking, in fact, symbolizes one of the many failings of the financial system leading up to the global financial crisis. Investment banks like Lehman Brothers and Bear Stearns are both part of the shadow banking system, as are hedge funds and money market funds. Indeed, the government agency charged with investigating what caused the 2008 crisis found that the lack of regulation in this shadow banking sector was a key cause of the crisis. They did not call it “shadow banking,” By . The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. Lehman’s Fall Cast a Long, Risky Banking Shadow. Last week saw the demise of the shadow banking system that has been created over the past 20 years. While traditional banks raised their lending standards, it was the collapse of the shadow banking system that was the primary cause of the reduction in funds available for borrowing. After the financial crisis, Congress and regulatory agencies cracked down on traditional banks. The term “shadow bank” was coined by economist Paul McCulley in a 2007 speech at the annual financial symposium hosted by the Kansas City Federal Reserve Bank in … Image courtesy of my friend Chris Temple. Regulating the Shadow Banking System ABSTRACT The shadow banking system played a major role in the recent financial crisis but remains largely unregulated. The shadow banks’ primary advantage is analogous to one of Uber’s initial advantages over traditional taxi services: less regulation. The above from Investopedia. For less affluent customers, who are more cost-conscious, shadow banks charge about the same as traditional banks. The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight since then. The good news is that shadow banking has been a major contributor to economic expansion since the 2008 financial crisis. We propose principles for its
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