Bernanke on "Shadow Banking"

In his speech, he said “shadow banking” institutions that were unregulated or lightly regulated were typically not required to report data that would have adequately revealed their risk positions or practices.”

Moreover, he said, the lack of preexisting reporting and supervisory relationships hindered systematic gathering of information that might have helped policymakers in the early days of the crisis.

Bernanke said much of the decline in house prices had occurred since the most intense phase of the crisis; the decline in prices since September 2008 is probably better viewed as largely the result of, rather than a cause of, the crisis and ensuing recession

“More fundamentally, however, any theory of the crisis that ties its magnitude to the size of the housing bust must also explain why the fall of dot-com stock prices just a few years earlier, which destroyed as much or more paper wealth–more than $8 trillion–resulted in a relatively short and mild recession and no major financial instability,” Bernanke said.

He said that “shadow banking”, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions–but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions.

Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper (ABCP) conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies, Bernanke said.

And, he said, “Before the crisis, the shadow banking system had come to play a major role in global finance.”