Nonbank financial institutions that make up the largely unregulated “shadow banking sector” pose serious risks to the U.S. financial system. Their growth in size, scope, and interconnectedness over the last decade has made them an increasing threat to financial stability and the safety and soundness of the regulated banking sector. The experiences of the 2008 financial crash and the 2020 pandemic-caused market stress have demonstrated that the risks in the shadow banking sector significantly exacerbate the pace and depth of market stress, spillover directly into the banking sector, and threaten to virtually shut down key financial markets and the economy.

Better Markets’ series examines various issues in shadow banking:

• Our first report provides an overview of the structure of and risks within the shadow banking sector as well as actions financial regulators could take to mitigate risks to the U.S. financial system.

• Next, our shadow bank series covers money market funds (MMFs) and the systemic risks they pose to the U.S. financial system. MMFs are the proverbial “canary in the coalmine” whereby MMF runs quickly transmit into the short-term money markets and then into the core of the banking and nonbank financial systems, pushing them to the brink of collapse and precipitating bailouts. Oure reports argues that the industry finally must be sufficiently regulated to protect the taxpayer, financial system, and economy.

• Our most recent report focuses on U.S. Treasury Markets. The Treasury markets have a long history as the most important financial markets in the global financial system. Virtually every financial market asset from bonds to derivatives and every financial product from mortgages to large commercial loans are affected by the Treasury markets. While previous stress events may have seemed isolated or one-off occurrences, our report shows that pandemic stress dramatically showed that the fragilities in these markets are indeed fundamental issues that must be addressed.