The Financial Times’ Tracy Alloway has a nice piece that crystallizes concerns circulating among many observers regarding reforms to the banking system. New rules designed to increase the safety of the banking system are forcing banks to get smaller in a number of ways. But are these reforms just pushing the same risks off into the shadow banking system?
The public discussion is muddled in a couple of ways. A few useful distinctions can help to separate sensible concerns from baseless anxiety. A good place to start is the Volcker Rule. Alloway writes that “Some proprietary trading businesses that are no longer allowed at deposit-taking US banks under the Volcker rule have morphed into newly minted hedge funds.”
This is exactly what is supposed to happen. It does not reflect a worrisome expansion of the shadow banking system.