The U.S.’s substantial shadow banking system could be the source of the next financial panic, the former president of Atlanta’s Federal Reserve Bank has suggested.
The U.S. banking system itself is in rude health, having reformed under increased regulatory pressure in the wake of the financial crisis. Any moves by the President Donald Trump administration to reverse this are unlikely to dramatically undermine this progress, according to Dennis Lockhart. However, the shadow banking system, which refers to financial intermediaries that are involved in the creation of credit but are not subject to regulatory oversight, could be a pressure point to watch, he told CNBC Wednesday.
“I think one thing worth watching, not to say that it’s going to be the source of a problem, would be the shadow banking system: The non-bank – but very large in the U.S. – system of money-market funds, securitization activity, non-bank financial firms,” he said.
“In the aggregate it adds up to a fair amount. Perhaps those entities will grow to be large enough and something could happen in that sector.”