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March 24, 2022

Better Markets Releases Report on the Dangers of the Unregulated Shadow Banking Sector

WASHINGTON, D.C.— Phillip Basil, Director of Banking Policy at Better Markets, issued the following statement around today’s release of Better Markets report on the shadow banking sector:

“Nonbank financial institutions that make up the largely unregulated shadow banking sector pose serious risks to the U.S. financial system that exacerbate the deterioration of financial stability in times of stress. In fact, the Federal Reserve has had to bail out this sector twice in the last decade through emergency support facilities that were designed to restore financial stability and the smooth functioning of the funding markets that are critical to the functioning of our economy.

“The growth in size, scope, and interconnectedness of the shadow banking sector over the last decade has made it an increasing threat to financial stability and the safety and soundness of the regulated banking sector. The same activities of the banking sector are performed in the shadow banking sector and carry the same risks, but unlike the banking sector, it is largely unregulated. This report provides an overview of this and how a lack of sufficient regulations leads to heightened stress in times of market turmoil.

“The regulatory agencies, with the FSOC in the lead, must act in the wake of the 2020 pandemic stress to reduce the risk in the shadow banking sector. Sufficiently robust regulations for this sector are necessary to protect the taxpayer, financial markets, and the economy. Until such regulations are in place, requirements for banks must be stronger to address the spillover of shadow banking stress into the banking sector. It is past time for nonbanks to be forced out of the shadows and be regulated like banks.”

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Better Markets is a non-profit, non-partisan, and independent organization founded to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

Contact: Evelyn Swan at 202-618-6433 or eswan@bettermarkets.org

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