Will regulators rein in the risk?

Executive Summary

Regulators are watching so-called shadow banks much more closely in the wake of the 2008 financial crisis, but how best to regulate money market funds, the market for repurchase agreements and other potentially risky activities remains hotly debated. The 2016 election could be a turning point for the monitoring of these non-bank financial institutions, if President-elect Donald Trump succeeds in dismantling large portions of the Dodd-Frank Act.

Some key takeaways:

  • The $36 trillion shadow banking sector is growing, although some risky activities, such as securitization, are less widespread than before the crisis.

  • There’s a broad recognition that financial stability depends on the health of shadow banks as well as traditional institutions, but regulators and Congress are still evaluating the best methods for containing risk.

  • Policymakers are keeping an eye on the growth of shadow banking in emerging markets, particularly in China.

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Gorton, Gary, “Slapped by the Invisible Hand: The Panic of 2007,” Oxford University Press, 2010. A Yale professor with expertise in shadow banks examines the causes of the financial crisis and the role that non-bank institutions played.

Johnson, Simon, and James Kwak, “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown,” Pantheon Books, 2010. Two professors from the Massachusetts Institute of Technology (Johnson) and the University of Connecticut (Kwak) chart the rise of the U.S. financial system since the country’s founding and advocate for breaking up the largest institutions.

Ricks, Morgan, “The Money Problem: Rethinking Financial Regulation,” University of Chicago Press, 2016. A Vanderbilt University law professor lays out his plan for reforming the banking system, including a proposal for eliminating the risks from shadow banks reliant on short-term debt.

Ross Sorkin, Andrew, “Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves,” Penguin Books, 2009. A detailed account of the mortgage meltdown based on extensive interviews with bankers and government officials at the center of the crisis.


Dark and Stormy,” The Economist, May 7, 2016, http://tinyurl.com/hfn6l47. A report discusses the growing shadow banking risks emerging in China.

Alloway, Tracy, and Michael Mackenzie, “US regulators threaten new repo rules,” Financial Times, Oct. 4, 2013, http://tinyurl.com/gqql58y. An overview of steps regulators were considering to rein in some of the risks associated with “fire sales” in financial markets.

Burne, Katy, “Tarullo Says Shadow Banking Risks Could Reappear,” The Wall Street Journal, Oct. 21, 2016, http://tinyurl.com/gn8wdte. Highlights from a speech by a top Federal Reserve official on the risks shadow banking activities pose to the financial system.

Harrison, David, “Fed Vice Chairman Stanley Fischer: ‘Great Fear’ About Antiglobalization,” The Wall Street Journal, Oct. 7, 2016, http://tinyurl.com/ztcdfv5. Another senior Fed official raises warnings about shadow banks and the need for stronger oversight.

Ludwig, Eugene, “Unregulated Shadow Banks Are a Ticking Time Bomb,” American Banker, March 15, 2016, http://tinyurl.com/zaf333j. The former comptroller of the currency says in an op-ed that the risks from shadow banks are mounting, calling on regulators to focus on the activities and practices that are most worrisome.

Lynch, Sarah N., “SEC’s long path to money market fund reform ends in compromise,” Reuters, July 23, 2014, http://tinyurl.com/guhgyup. A look at new rules on money market funds from the Securities and Exchange Commission and how the Financial Stability Oversight Council pressured the agency to act.

Reports and Studies

“2016 Annual Report,” Financial Stability Oversight Council, June 2016, http://tinyurl.com/j6p3vxj. An overview of risks to the financial system compiled by a council of U.S. banking regulators led by the Treasury Department.

“The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” Financial Crisis Inquiry Commission, 2010, http://tinyurl.com/7vqp9qe. The official report by a congressionally appointed commission to investigate the root causes of the financial crisis.

“Global Shadow Banking Monitoring Report 2015,” Financial Stability Board, Nov. 12, 2015, http://tinyurl.com/jlcjjyc. An annual look at the size and scope of the global shadow banking sector, produced by an international body of regulators.

Adrian, Tobias, and Adam B. Ashcraft, “Shadow Banking Regulation,” Federal Reserve Bank Staff Reports, April 2012, http://tinyurl.com/jfmvttm. A technical overview of the shadow banking market and efforts to regulate the sector.

The Next Step


Hsu, Sara, “No Stopping China’s Shadow Banking Beast,” Forbes, Sept. 20, 2016, http://tinyurl.com/zogsxls. China’s shadow banking industry increased from 40 percent of its gross domestic product (GDP) at the end of 2014 to 78 percent of GDP at the beginning of 2016.

Verma, Sid, “Shadow Banking in China Appears to Have Made a Roaring Comeback,” Bloomberg, Dec. 14, 2016, http://tinyurl.com/hy5deab. A surprise jump in Chinese shadow banking from 55 billion yuan ($7.9 billion USD) in October to 479 billion yuan ($68.9 billion USD) in November raised questions about the financial sector’s stability.

Yap, Chuin-Wei, and Chao Deng, “China Regulators Issue New Draft Rules to Curb Shadow Banking,” The Wall Street Journal, Nov. 23, 2016, http://tinyurl.com/jto8auf. China’s regulators are trying to target specific areas of the financial system for closer scrutiny in an effort to curb risky loans.

Industry Regulations

Creighton, Adam, “Tougher Bank Stress Tests Urged in Government Report as Corporate Debt Spikes,” The Wall Street Journal, Dec. 13, 2016, http://tinyurl.com/grysc3g. Despite an improvement in the U.S. financial system’s overall risk level in the past year, a government report urged the Federal Reserve to impose tougher stress tests on banks due to increased corporate debt.

Ritson, Alex, “Should US banks do more to prevent a banking crisis?” BBC News, Nov. 25, 2016, http://tinyurl.com/j9venqd. Banks should be forced to increase their capital reserves as a safeguard in case of another financial crisis, according to the president of the Federal Reserve Bank of Minneapolis.

Scoville, Ian, “Biden Cautions Against Deregulation,” The Hoya, Dec. 6, 2016, http://tinyurl.com/h8bdtj6. Vice President Joe Biden advised against repealing financial regulations, saying they help protect the country from crises.

Trump’s Plans

Barr, Michael S., “Trump’s Dismantling of Dodd-Frank Would Be 2008 All Over Again,” Fortune, Dec. 8, 2016, http://tinyurl.com/glffb6j. President-elect Donald Trump’s call to dismantle the Dodd-Frank Act ignores the role of shadow banking and risks recreating the conditions that produced the financial crisis, according to a senior fellow at the Center for American Progress.

Cox, Jeff, “Yellen defends the Dodd-Frank bank rules that Donald Trump wants to scrap,” CNBC, Dec. 14, 2016, http://tinyurl.com/h2xj4r2. Reacting to criticism that Dodd-Frank stifles small and midsized banks, Federal Reserve Chair Janet Yellen defended the law, saying it has helped produce “a safer and stronger financial system.”

Onaran, Yalman, “Range of options await Trump on bank rules,” Bloomberg, The Journal Gazette, Dec. 4, 2016, http://tinyurl.com/jjjl9vh. Some analysts predict that Trump’s replacement of key officials in federal regulatory agencies will diminish efforts to reduce shadow banking risks.

Wall Street

Natarajan, Sridhar, “Shadow Banks Make Diciest Loans While Wall Street Retains Risk,” Bloomberg, May 16, 2016, http://tinyurl.com/jafqe4f. As traditional banks cut back on high-risk lending, the shadow banking sector is enlarging its role in such loans; it also is increasing its borrowing from Wall Street to finance them, according to a report from the Federal Reserve Bank of New York.

Schwarzberg, Jonathan, and Lynn Adler, “LPC: Hopes rise that high-risk lending curbs will ease under Trump,” Reuters, Business Insider, Dec. 16, 2016, http://tinyurl.com/jpxfjcd. A group of bankers, investors and lawyers said that a pro-Wall Street Trump administration will likely ease regulations on banks that practice high-risk lending.

Scully, Matt, “Traders Caught Up in Wall Street Probes Switch to Shadow Banking,” Bloomberg, Dec. 7, 2016, http://tinyurl.com/hmhchg2. Some mortgage bond traders at large banks who were caught up in internal or government investigations have moved to the shadow banking industry.


Americans for Financial Reform
1620 L St., N.W., 11th floor, Washington, DC 20006
Nonprofit watchdog group that strives for greater “Wall Street accountability.”

Cato Institute
1000 Massachusetts Ave., N.W., Washington, DC 20001
Libertarian think-tank argues that greater regulation is the wrong approach.

The Clearing House
1114 Avenue of the Americas, 17th Floor, New York, NY 10036
Trade association and payments system for commercial banks.

Federal Reserve
Constitution Avenue and 20th Street, N.W., Washington, DC 20551
Regulator that oversees bank holding companies; is charged with writing new rules for firms the Financial Stability Oversight Council designates as systemically important.

Financial Stability Board
Secretariat to the Financial Stability Board, Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel, Switzerland
+41-61-280-9100 (fax)
International body of regulators monitoring the health of the global financial system.

Financial Stability Oversight Council
1500 Pennsylvania Ave., N.W., Washington, D.C. 20220
Regulatory body, led by the Treasury secretary, tasked with monitoring risks to the financial system and designating non-bank institutions as “systemically important.”

International Swaps and Derivatives Association
360 Madison Ave., 16th Floor, New York, NY 10017
Organization representing derivatives market participants, including corporations, banks and insurance companies.

Managed Funds Association
600 14th St., N.W., Suite 900, Washington, DC 20005
Trade organization for hedge funds.

Office of Financial Research
U.S. Department of the Treasury, 717 14th St., N.W., Washington, DC 20220
Independent office within the Treasury Department charged with compiling data and analysis on systemic risks; supports the work of the Financial Stability Oversight Council.

Securities Industry and Financial Markets Association
120 Broadway, 35th Floor, New York, N.Y. 10271
Organization representing the securities industry, including investment firms, asset managers and banks.

DOI: 10.1177/237455680301.n1