One of the Main Indicators of Financial Danger Has Increased

The failure to regulate the shadow banking system was one of the causes of the financial crisis.

As we noted in 2009, the Bank for International Settlements – often described as a central bank for central banks (BIS)  – slammed the Federal Reserve for failing to rein in the shadow banking system:

How could such a huge shadow banking system emerge without provoking clear statements of official concern?

Years later, the Fed and other regulators have allowed the shadow banking system to grow even bigger.

As Reuters notes today:

The system of so-called “shadow banking,” blamed by some for aggravating the global financial crisis, grew to a new high of $67 trillion globally last year, a top regulatory group said, calling for tighter control of the sector.

A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policymakers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and banking activities.

***

The study by the FSB said shadow banking around the world more than doubled to $62 trillion in the five years to 2007 before the crisis struck.

But the size of the total system had grown to $67 trillion in 2011 — more than the total economic output of all the countries in the study.

***

The United States had the largest shadow banking system, said the FSB, with assets of $23 trillion in 2011, followed by the euro area — with $22 trillion — and the United Kingdom — at $9 trillion.

The U.S. share of the global shadow banking system has declined in recent years, the FSB said, while the shares of the United Kingdom and the euro area have increased.

At the same time, authorities have relaxed rules against fraud, excessive leverage and moral hazard … three of the other main causes of the financial crisis.

Category: Bailouts, Derivatives, Really, really bad calls, Regulation, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

One Response to “Shadow Banking System Larger than at the Start of the Financial Crisis”

  1. 873450 says:

    “As we approach the twenty-first century, both banks and nonbanks will need to continually reassess whether their risk management practices have kept pace with their own evolving activities and with changes in financial market dynamics and readjust accordingly. Should they succeed I am quite confident that market participants will continue to increase their reliance on derivatives to unbundle risks and thereby enhance the process of wealth creation. ”
    - Alan Greenspan (3/19/99)

    “The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions … Derivatives have permitted the unbundling of financial risks.”
    - Alan Greenspan (May 2005)

    “There’s no question about it, … Wall Street got drunk, that’s one of the reasons I asked you to turn off the TV cameras. It got drunk and now it’s got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments.”
    - George W Bush (July 2008)

    When TBTF Wall Street’s sophisticated, magical house of cards inevitably collapsed we got fed The Big Lie blaming all sorts of peripheral players – late to the game GSE’s, over borrowing deadbeat American home buyers, Barney Frank, corrupt appraisers, incompetent rating agencies, etc. – for a global financial catastrophe permanently lowering living standards for billions of people, except of course, those most responsible for it.

    Unmonitored, unregulated and unchecked, what goes around comes around. Again!