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Combatting the Dangers Lurking in the Shadows: The Macroprudential Regulation of Shadow Banking

Author

Listed:
  • David Longworth

    (Carleton University)

Abstract

Since the 2008/09 financial crisis, the international regulatory community has taken steps to reduce the probability of future significant financial instability. So far, the emphasis has been on tougher capital and liquidity regulations for banks and greater transparency for financial products, and greater regulation of financial infrastructure such as central counterparties, trade repositories, and the clearing of over-the-counter derivatives. To mitigate the risks of another run on the shadow banking system greatly amplifying financial instability, some shadow banking entities ought to be regulated as banks or in a similar fashion to banks (for example, with capital and liquidity requirements) while in other cases regulation should cover banks’ relationships with them, their procyclical behaviour in certain markets (such as those for repos), or the ratings process for securitized products. Because of the diversity of the various parts of the shadow banking system, the policy responses proposed in this study differ significantly across those parts. Taken together, the implementation of these policies should help reduce systemic risk and the probability of future periods of financial stress, for a stronger and more stable financial system.

Suggested Citation

  • David Longworth, 2012. "Combatting the Dangers Lurking in the Shadows: The Macroprudential Regulation of Shadow Banking," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 361, September.
  • Handle: RePEc:cdh:commen:361
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    File URL: https://www.cdhowe.org/public-policy-research/combatting-dangers-lurking-shadows-macroprudential-regulation-shadow-banking
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    References listed on IDEAS

    as
    1. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," NBER Chapters,in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    2. Ricardo J. Caballero, 2010. "The "Other" Imbalance and the Financial Crisis," NBER Working Papers 15636, National Bureau of Economic Research, Inc.
    3. Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2014. "Sizing Up Repo," Journal of Finance, American Finance Association, vol. 69(6), pages 2381-2417, December.
    4. David Longworth, 2010. "Warding Off Financial Market Failure: How to Avoid Squeezed Margins and Bad Haircuts," C.D. Howe Institute Backgrounder, C.D. Howe Institute, issue 135, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Adam Found & Peter Tomlinson, 2012. "Hiding in Plain Sight: The Harmful Impact of Provincial Business Property Taxes," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 368, December.
    2. Philip Cross & Philippe Bergevin, 2012. "Turning Points: Business Cycles in Canada Since 1926," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 366, October.
    3. Philippe Bergevin & William B.P. Robson, 2012. "More RRBs, Please! Why Ottawa Should Issue More Inflation-Indexed Bonds," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 363, September.

    More about this item

    Keywords

    Financial services; Economic growth and innovation; financial regulators; shadow banking sector;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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