Shadow banking: are the shadows really the banks? - opinion

Author: | Published: 30 Oct 2012

Since the onset of the financial crisis five years ago, a huge effort has been spent on regulating banks more stringently. Until recently, the so-called shadow banking sector, which is built around the provision of credit and maturity and liquidity transformation, received much less attention. But this is no longer the case, as regulators are gearing up to deal with it.

In basic terms, shadow banks run the inherent risks of borrowing short and lending long, without the capital and liquidity safeguards that banks are obliged to apply. Shadow banking entities which raise funds through investments can be subject to bank-like runs, potentially bringing down a chain of credit intermediaries and banks which the real economy relies upon.

The problem is not a new one –a shortage of liquidity and withdrawal of investment in the shadow banking sector exacerbated the credit crunch. A multi-billion dollar run on US money market...