Bank-Run Risk in the Shadows – WSJ.com

Bank-Run Risk in the Shadows – WSJ.com.

These panics often originate in the shadows of the banking system, where major financial institutions do business with one another. To say it isn’t well understood would be an understatement; the Financial Stability Board, which works on behalf of G-20 countries for financial reform, has formed a task force to clarify what is meant by “shadow banking” in order to monitor and identify potential ways of regulating it.

The FSB’s working definition of shadow banking is “credit intermediation involving entities and activities outside the regular banking system.” It is akin to a banking system for banks and other financial institutions, where “depositors” exchange cash with borrowers in return for collateral for short periods of time, typically in the form of repurchase agreements. The FSB put the size of shadow-banking activities at roughly $60 trillion as of 2010—a sum that represents 25% to 30% of the total global financial system.

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