Rebooting Economy XVI: How governments run shadow banking and risk financial stability
That shadow banking was at the core of the financial sector meltdown that led to the Great Recession of 2007-08 is well documented and so is the fact that it remains big and powerful enough to cause serious financial crisis and yet, India and the US continue to promote it
- Aug 12, 2020,
- Updated Aug 12, 2020 8:48 PM IST
The most shocking aspect of shadow banking entities world over is that these are run and promoted by governments and government-run entities to the detriment of regulatory oversights evolved over time to ensure financial stability.
The shadow banking system "consists of financial institutions that look like banks, act like banks, and borrow and lend like banks, but - and here's the important part - are not regulated like banks". That is how Prof. Nouriel Roubini of the New York University described it in his book 2010 "Crisis Economics", co-authored with Prof. Stephen Mihm of the University of Georgia.
Prof. Roubini is also known as "Dr. Doom" for accurately predicting that the US housing bubble would burst, plunging the world economy into recession. Many other economists too had forewarned the same, but they were ignored, even ridiculed.
The centrality of shadow banking to the 2007-08 financial crisis is well documented. Prof. Roubini and co-author narrated how complex, dodgy, and risky housing mortgage-backed securities were bundled, sliced, and diced into different levels of credit risks and transmitted around the world, spreading toxic assets. They concluded, like many others: "It's little wonder that the shadow banking system was at the heart of what would become the mother of all bank runs."
The most shocking aspect of shadow banking entities world over is that these are run and promoted by governments and government-run entities to the detriment of regulatory oversights evolved over time to ensure financial stability.
The shadow banking system "consists of financial institutions that look like banks, act like banks, and borrow and lend like banks, but - and here's the important part - are not regulated like banks". That is how Prof. Nouriel Roubini of the New York University described it in his book 2010 "Crisis Economics", co-authored with Prof. Stephen Mihm of the University of Georgia.
Prof. Roubini is also known as "Dr. Doom" for accurately predicting that the US housing bubble would burst, plunging the world economy into recession. Many other economists too had forewarned the same, but they were ignored, even ridiculed.
The centrality of shadow banking to the 2007-08 financial crisis is well documented. Prof. Roubini and co-author narrated how complex, dodgy, and risky housing mortgage-backed securities were bundled, sliced, and diced into different levels of credit risks and transmitted around the world, spreading toxic assets. They concluded, like many others: "It's little wonder that the shadow banking system was at the heart of what would become the mother of all bank runs."