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COLUMN: Shadow banking hangover still to come

Nov 20 2012 James Saft, Reuters

Like a hangover that starts before you even go to bed, the fact that the shadow banking system has expanded since the crisis bodes poorly for what comes in the morning. Shadow banking, financial intermediation done in such a way as to elude regulations imposed on traditional banks, has actually grown since the onset of the financial crisis in 2007 and stands at $67 trillion worldwide, according to a new accounting from the Financial Stability Board. That's hard to square with assumptions that investors, stung by losses caused by a run on assets in shadow banking during the crisis, have learned their lesson, much less that economic growth is being crimped in part by falling credit and money creation by shadow lenders. One likely implication is that new credit and debt created by the shadow banking system is an example of the law of diminishing returns, spurring less growth per dollar than previously. Another is that when regulation begins in earnest worldwide, taking credit creation

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