Shadow Banking and Securities Law
Shadow banking may be the single greatest challenge facing financial regulation. Financial institutions that function like banks, but outside the scope of banking regulation—aptly termed, “shadow banks”—were at the heart of the 2007-2008 Global Financial Crisis and most episodes of serious financial stress since then. The direct costs of shadow banking can be significant, and […]
Gabriel Rauterberg is a Professor of Law and Jeffery Y. Zhang is an Assistant Professor of Law at the University of Michigan Law School. This post is based on their article forthcoming in the Journal of Stanford Law Review.
Shadow banking may be the single greatest challenge facing financial regulation. Financial institutions that function like banks, but outside the scope of banking regulation—aptly termed, “shadow banks”—were at the heart of the 2007-2008 Global Financial Crisis and most episodes of serious financial stress since then. The direct costs of shadow banking can be significant, and when it precipitates broader economic crisis, shadow banking can cause long-lived harm to economic growth and social welfare. For the most part, leading economists and legal scholars have converged on a shared approach: the solution to shadow banking is to apply banking regulation to it, in part or in whole, to encompass shadow banks “in the banking regulatory perimeter.” Yet whatever the significant merits of this view, regulators and politicians have made little headway in adopting the more dramatic reform proposals.
