Late last week, S&P published, "A Supervisory Framework For U.S. Shadow Banking Is Progressing Slowly". It says, "The term "shadow banking" first became prevalent in the aftermath of the financial crisis, and it lacks a universally consistent definition. In Standard & Poor's Ratings Services' view, shadow banking is credit intermediation (involving activities and entities) outside the regular banking sector, as the Financial Stability Board (FSB) defines. Shadow banking encompasses not only special-purpose vehicles that are beyond the Federal Reserve's supervision (such as money market funds and government-sponsored enterprises) but also specific instruments such as swaps, repurchase agreements, and asset securitizations. However, the term can oversimplify investment vehicles and products that are complex and interact very differently with the formal banking system. Investors seem to be asking two key questions about shadow banking. The first is to what extent shadow banking might replace traditional banking in the U.S. financial sector. Fed data suggest that this has yet to happen. The second question is whether banking regulators will effectively and quickly implement a supervisory framework that can contain systemic risk by eliminating regulatory arbitrage and providing greater transparency. Banking regulators are taking steps toward this, though they recognize that they still have work to do. We believe swathes of shadow banking activity (in both new and existing forms) will continue to operate outside the reach of regulators once the economic recovery firms up."
