A careful reconstruction

Author: Gemma Varriale | Published: 2 May 2012


The fallout from the 2008 financial crisis spared no-one – investors were crushed, financial institutions collapsed, models discredited and market practice thrown into disarray. The subsequent Basel III, Dodd-Frank and its European equivalent regulations have changed the face of financial markets, from derivatives trading standards to bank capital charges.

However the shadow banking sector has so far escaped censure. Given that the freezing of this unregulated sector and its resultant spillover into the regulator financial system was a key element in the crash, it is perhaps surprising that this sector has managed to escape unharmed for so long.

According to one estimate from the Financial Stability Board (FSB), the global shadow banking system was worth around €46 trillion in 2010. This accounts for 25 to 30% of the total financial system and half the size of bank assets.

But the tide is turning. Financial supervisors, preoccupied with the mandate of preventing...