Next crisis could come from the shadow banking system, says ex-Fed member Lockhart

Pendulum of banking regulation tends to swing: Dennis Lockhart

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."

Risk has shifted towards this growing sector in the past year, and away from former stress points, such as European and U.S. banks, Lockhart noted, saying that he would be "surprised" if Trump's touted regulatory "haircut" caused serious damage to any major banks.

"The pendulum of regulation tends to swing, and understandably after the crisis it swung very far in one direction. There's been tremendous progress in terms of the resilience of the financial services industry across the U.S. and the rest of the world, and it think it's perfectly appropriate that the pendulum swings back – it's just a question of how far back it swings," he said.

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