if you still think banks are the core representative institutions in the financial system of high-income economies, you are a few decades out of date. If you are concerned about the dangers of financial sector risks cartwheeling into the real economy, you need to think about the shadow banking sector. Muscatov and Perez point out that while banking regulators do try to think about risks from the shadow banking sector, “Still, many areas of NBI remain obscured from regulators’ view, and not all NBI is subject to supervision.”
NBI is “non-bank intermediation.” Read the whole post.
Freddie and Fannie are non=bank intermediaries. Back in the late 1980s and the 1990s, they drove traditional lending institutions out of a large segment of the mortgage market. They did not do this through inherent advantages of scale or business model. They did it because they enjoyed small advantages from a regulatory standpoint, including lower capital requirements.
The moral of the story is that the “better” job you do of regulating banks, the more room you leave for other financial intermediaries to take over niches. I do not think that you can get financial regulation to achieve the goal of stabilizing the financial system. I think that it just winds up being a tool for allocating credit to politically preferred uses.
Even when they try to do an objective, scientific, fair job, they end by playing for the powerful.
I started looking at the older posts that he links to, and noticed the following (quoted from another source): “Although data limitations prevent a comprehensive assessment, the U.S. shadow banking system appears to contribute most to domestic systemic risk; its contribution is much less pronounced in the euro area and the United Kingdom.”
Any ideas about what the difference might be?
Oops, never mind. I really should finish reading before I post comments.
Sorry, sorry, I finished the relevant posts, and I’m still curious: why is there so much more shadow banking in the U.S.A. then in other countries (another post adds Canada among them)?
Closer would be S&Ls leveraged gambles failed forcing the GSEs to pick up after them since no one else wanted to take the risk. They succeeded because everyone wanted the guarantee, something markets would later pretend to offer through collateralized debt swaps. We saw how well that worked out.
Doesn’t seem to have worked out very well for the GSE’s, either.
I read many stories about the run on the shadow banking system. Not one gave me a clue to where everyone was running to.
I consider “capital requirements” as the key regulation for controlling risk — and we would have much more financial stability with 50% Tier 1 capital (essentially equity at risk) for banks.
Big, unregulated Non-banks should be allowed to act more like a market — with NO bailouts.
The bailout of LTCM was wrong — they should have gone thru bankruptcy, and the many other losers should have lost.
TARP was wrong – AIG & Goldman and other Big Banks should have gone bankrupt.
No regulation will work if “stability” is interpreted to mean bailouts for the rich who have gambled and lost. Instead, the central bank should be ready to offer services, like loans to companies & house buyers, if the Big Banks fail — the main street economy does not Big Banks per se, but needs a way to get loans.
Best path now: replace Dodd Frank with increasing capital requirements.
Not what has been happening.
“When most people think of capital, they mean the sort that represents “skin in the game,” or common equity. So what’s been the trend there? At the passage of Dodd-Frank, banks held $55.5 billion in common stock and perpetual preferred shares. At year-end 2015, that number was $52.7 billion. ”
<< http://www.alt-m.org/2016/03/18/did-dodd-frank-increase-bank-capital/