The Chairman of the FSA on the risks that “shadow banking” poses to financial stability
Adair Turner, the Chairman of the Financial Services Authority, gave a speech today in which he explained what “shadow banking” is, set out how it sector contributed to the financial crisis, the risks it still poses to financial stability and the importance of a sufficiently comprehensive and radical policy response.
Lord Turner concluded his speech with this:
“One of the odder sounding recommendations to appear recently in an official report on shadow banking, is that made in the July 2010 report from the Federal Reserve Bank of New York, where the authors state clearly ‘We recommend putting the accompanying map of the shadow banking system on a 36 inch by 48 inch poster’.
But it’s a necessary recommendation given the sheer complexity of the system they have mapped. Any system this complex will defy complete understanding and any belief that we can precisely calibrate our response to it will therefore be a delusion. Given the enormous cost which instability can produce, and given the uncertain benefits which this complexity has delivered, our regulatory response should therefore entail a bias to prudence – a bias against complex interconnectivity, against procyclical market contracts, and against allowing maturity transformation or high leverage to develop in unregulated institutions or markets.”
The accompanying slides are here.
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