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Fed's Stein says shadow banking more prone to bank runs

Jeremy Stein, governor of the U.S. Federal Reserve.
Andrew Harrer | Bloomberg | Getty Images
Jeremy Stein, governor of the U.S. Federal Reserve.

The so-called shadow banking sector is inherently more susceptible to bank runs, a top Federal Reserve official said in comments about a corner of Wall Street that played a pivotal role in the 2007-09 financial crisis.

Federal Reserve Governor Jeremy Stein told economists at a conference on Friday that financial firms outside of traditional banking are less stable because they rely less on cash deposits, deposit insurance and access to government support.

Shadow banking is a nebulous sector of finance that comes in many formsfrom payday loans and "crowdfunding'' websites on Main Street, to securitized products, money-market funds and repurchase agreements on Wall Street.

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It remains largely unregulated, which is a concern to many economists.

"Shadow banking money is much more run prone than bank money,'' Stein said in comments that did not touch on the health of the economy or the outlook for monetary policy.

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Part of the reason for this instability, Stein said, is that non-bank financial institutions often give investors the option to seize collateral in a transaction "at a moment's notice.''

Shadow banking was a key factor in the collapse of Lehman Brothers at the height of the financial crisis in 2008, which led to a raft of new regulations for bank capital and derivatives trading.

—By Reuters

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