Shadow Banks Put System At Risk

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    Shadow banks ‒ non-bank lenders and other financial intermediaries that operate outside the realm of banking regulation ‒ are putting consumers, investors, and the overall financial system at risk, says a paper by the Global Risk Institute. ‘Shadow Banking: Non-bank Credit Intermediation Heightens Risks for Global Financial System’ notes that despite regulatory reforms in the wake of the 2007-2009 financial crisis, or perhaps because of them, non-bank entities continue to grow and innovate. Growth in the non-bank sector has been significant. The Financial Stability Board estimates that shadow banks around the globe had US$36 trillion in assets at the end of 2014, or more than a quarter of the traditional banking industry. And while they provide more sources of liquidity, thereby supporting economic growth and diversifying risk across the financial system, they are not subject to the same regulatory standards and safeguards for capital, liquidity, or leverage that protect the banking system. This means they can take on much higher levels of risk. The paper questions whether borrowers are sufficiently aware of the risks, including the risk of a forced asset sale if they default, or if their lender goes under and they cannot find financing from other sources.