Regulators face challenge in tackling shadow banking

Following the 2008 financial crisis, Congress passed the Dodd-Frank Act, a massive bill designed to increase regulation of almost every aspect of the financial system. Almost two years following the enactment of the legislation, regulators find themselves grappling with how to implement the law, particularly with regard to non-traditional banking.

Vikram Pandit of Citigroup tells the Financial Times, “You cannot address systemic risk unless you tackle things other than banks. We’ve gravitated from a hub-and-spoke world, where everything used to go  through large financial institutions, to a network of millions of points of  contact with each other,” says Mr Pandit.

This was echoed in a speech by Federal Reserve Board Chairman Ben Bernanke, who has called for better regulation of shadow banking.

“Gaps in the regulatory structure, which allowed some systemically important nonbank financial firms to avoid strong, comprehensive oversight, were a significant contributor to the crisis. The Federal Reserve has been working with the other member agencies of the Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Act, to close these regulatory gaps,” said Bernanke.

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