Banking watchdogs are sniffing out a new target: shadow banks. Concerns that such institutions have no backstop in case of crisis and offer opportunities to engage in risky, if not illegal behavior, are pushing regulators for the G20 to look more closely at such institutions.
Reuters reported Tuesday that shadow banks–so christened by former PIMCO portfolio manager Paul McCulley–are in the spotlight because of the risks they present. Godfried De Vidts, director of European affairs at brokerage firm ICAP, said in the report, “Shadow banking is not really well named. It would be preferable to have a better description of what is a wide range of nonbank intermediaries. As it stands, it sounds a bit pejorative.”
That said, De Vidts added, “In America, increased financial activity is taking place between nonbanks which are subject to little or no regulation, and Europe is catching up fast.”
Shadow banks do not have government backing to support them in case of a run on funds. Also, according to the Financial Stability Board, a body mandated by the G20 group of the world’s richest economies to create new rules for shadow banking they could be used to evade financial regulation and draw risky activities prohibited elsewhere.