The Bankwatch

Tracking the consumer evolution of financial services

The Shadow Banking system is twice the size of normal banking

Gillian Tett from the FT points out the report from the Fed on the Shadow Banking (unregulated and misunderstood) system that represents value almost double the regular banking system ($20 trillion vs $11 trillion).  Her point is that this is unknown misunderstood and unregulated territory.

Here is a snapshot of one small part of the picture of the shadow banking system as depicted by the NY Fed.  This small (< 10%) part of the larger picture provides a sense of the complexity.  While the immediate conclusion might be that the regulators should focus on the primary offerors of banking services and treat the rest as ‘outside’ this fails to account for the interconnectedness of the primary offerors and the shadow system. 

We can always go back to cash under the mattress of course.


Here is the full report.  (HT Gillian Tett)

Road map that opens up shadow banking |

But it should be mandatory reading for bankers, regulators, politicians and investors today. Indeed, they might do well to hang similar posters next to their desks, for at least three reasons. For one thing, this circuit board is a reminder of how clueless most investors, regulators and rating agencies were before 2007 about finance. After all, during the credit boom, there was plenty of research being conducted into the financial world; but I never saw anything remotely comparable to this road map.

That was a striking, terrible omission. The Fed now estimates that in early 2008 shadow banking was $20,000bn in size, dwarfing the $11,000bn traditional banking system. And though this shadow system has now shrunk to a “mere” $16,000bn, this remains bigger than traditional banking, at some $13,000bn. Little wonder, then, that so few people immediately appreciated the significance of the seizing up of shadow banking in 2007.

Written by Colin Henderson

November 22, 2010 at 01:04

Posted in Uncategorized

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