August 1, 2016
The Federal Reserve Bank of Dallas has warned that, despite banking regulations such as Dodd-Frank, shadow banking “has come roaring back.” The term “shadow banking” originated in 2007, and describes large banks’ practices of building off-balance-sheet legal entities to hide from regulatory oversight. These days, the Dallas Fed said shadow banking refers to financial intermediaries that perform banking activities – but without oversight, regulation and deposit insurance. These are referred to as nonbank intermediation, or NBI.
The Dallas Fed’s concern is that NBI players operate beyond banking system safeguards, making shadow banks more vulnerable to financial stress. “The diversity and connections with traditional banks accentuate the need for policymakers to remain watchful for NBI as a potential source of credit risk and a catalyst for asset fire sales in times of financial stress,” the Dallas Fed noted.
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