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Shadow Banking Regulation

Peter J. Wallison of the American Enterprise Institute has written an article entitled, "Does Shadow Banking Require Regulation?"  The report analyzes recent calls by regulators and other to impose additional regulation on various components of what is referred to as the "shadow banking system," including money market funds.  Wallison concludes that to "impose additional regulation on the shadow banking or securities system would add costs that will impair economic growth; it would not be sound policy to do so without evidence that the shadow banking system is inherently unstable."  The paper rejects that conclusion, arguing that the shadow banking structure was "no more at fault for what happened in the crisis than was regulated deposit banking." 

Wallison's "key points" are as follows:

The calls from regulators and others for additional regulation of so-called "shadow banks" are a rush to judgment.

Although Lehman Brothers and other nonbank firms failed or needed rescues during the financial crisis, so did many regulated banks.

The financial crisis was a one-of-a-kind event that overwhelmed all forms of regulation; a failure under these conditions says nothing about the inherent stability of shadow banks.

It would be costly and unsound policy to impose new regulation on shadow banks or other firms in the securities markets without evidence that they are inherently unstable.


The complete article can be found here: