The Past Crisis Era, Invisible Risk and Strict Regulation for Shadow Banking?

Based the collapsing of American housing market, the associated derivatives were crashed. These derivatives mostly were defined into the shadow banking system, which drawn attention of the government and normal individuals. Moreover, the invisible risk of shadow banking was faded its cover by public, people attend to assess the magnitude of risky coefficient for different financial product belong to the shadow banking system. The scale of shadow banking was influenced to a large extent consequently.The figure depicts the changing trend in the period from 2002 to 2011, it explicitly denotes there is a huge discrepancy between the increasing speed before 2007 and that of which after 2007.

Particularly, for the USA market, the shadow banking is not the nominally traditional banking,  but it plays the similar role indeed as the traditional banking which typically offer financial bridge combining borrowers with lenders. Before the financial crisis, the shadow banking substitute the traditional banking as the mediation in the subprime loan. Moreover, shadow banking issue diversified derivatives with high leverage, combine different financial products and sale them to whole investors. Consequently, it resulted the cumulative financial risk chain which is volatile and fragile. High leverage, volatility, informational closure and lack of regulation, all these factors cause that shadow banking  breeds potential risk. 

Thus, in the past crisis era, not only the USA government but also other developed countries' government realize that regulation is the core part to secure the shadow banking system. They established diversified policy to define the detail of shadow banking's operation explicitly, which reduce the opportunity of inside operation and monitor the behavior of managers of varied financial institution included in the shadow banking system. For example, Goldman Sachs has been renamed as a bank holding company Goldman Sachs Group Inc, is also due to get a strong government bailout, but was included in the regulatory areas.

The video below is introducing the exigent need for regulating banking and reducing the high potential risk.    

 

As above said,  the high risk in shadow banking drawn attention from government and institutions, avoid the potential financial risk become the mail task for each government focus on establishing a healthy financial market. Shadow banking would not been remove from the market, but it would be under a strong regulation and a highly disclosure environment. 

Thus, in the next post, I would like to introduce a hot topic recently, which is the risk of  dramatically increased shadow banking in China would lead a second financial crisis?