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posted on 15 August 2016

Shadow Banking Reemerges, Posing Challenges To Banks And Regulators

from the Dallas Fed

by Alex Musatov and Michael Perez

Shadow banking has come roaring back and in new forms that still manage to escape bank regulation and could pose systemic risks since these activities remain deeply intertwined with traditional banking.

"Shadow banking," an almost sinister-sounding term that originated in 2007, describes large banks' practice of constructing off-balance-sheet legal entities to circumvent regulatory oversight. These operations initially traded in instruments that repackaged bank-issued loans as bonds, selling them to investors.

Shadow banking has since become a catchall for financial markets and intermediaries that perform bank-like activities - transforming the maturity, liquidity or credit quality of capital. True to the term's origins, shadow banking remains lightly regulated, potentially harboring unique risks without the oversight and deposit insurance offered to more traditional counterparts.

Nonbank intermediation (NBI) is another term used to describe these kinds of financial activities and intermediation of capital. The process involves transactions of households, corporations and governments via institutions other than commercial banks.

[click on image below to continue reading]

Source: http://www.dallasfed.org/ assets/ documents/ research/ eclett/ 2016/ el1610.pdf

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