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June 24, 2014

Rulemaking proves tricky when dealing with shadow banking

“Regulators around the world are struggling to keep pace with the constantly evolving shadow banking sector, as they grapple with gaps in their understanding of the financial system and inter-agency turf wars play out in key jurisdictions.

“While the broad concept of shadow banking is easy to sketch out – essentially lending or other credit provision by groups other than banks – it is proving far harder to write rules for the sector’s menagerie of entities ranging from money-market mutual funds to peer-to-peer lenders and broker-dealers.

“It is extraordinary that here we are, nearly seven years in [from the financial crisis] and we still have an inadequate understanding of some of the key aspects of financial markets,” said David Wright, secretary-general of Iosco, an umbrella regulatory group. “How these markets interconnect with each other and the contagion channels is very difficult to calibrate.”

“The scarring experience of 2007-09 underlines how dangerous shadow finance can prove if regulators fail to stay on top of its evolution. Money market funds, now seen as a linchpin of the shadow sector, were thought to be among the world’s safest investments, but the industry was hit by panic after the market for bundled subprime loans went into meltdown and Lehman Brothers collapsed.”

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Read full Financial Times article here

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