Financial Stability Policies for Shadow Banking

Shadow banking is “credit intermediation that involves entities and activities outside the regular banking system.” Its liabilities today equal more than 70% of US GDP, up from around 1% in 1960. Like its size, shadow banking’s systemic importance and its potential for harming the real economy are enormous. The sector operates without public supervision or government backstops. While shadow banks can’t rely on direct state support, they can garner indirect support if their parent firms are traditional banks or insurance companies. Shadow banks transact with regulated financial institutions and thus could destabilize credit and securities markets. “Seven economic mechanisms” spur shadow...