Good News: The Fed Is Finally Going After Leverage in the Shadow Banking Sector

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Here’s some welcome news. The Fed is bringing back an old tool to regulate leverage in the financial market: increased margin requirements. And in even more welcome news, these requirements will apply to everyone, not just banks:

A little-noticed global agreement recently paved the way for the central bank to move forward with plans to alter margin requirements. Under the accord announced Nov. 12, regulators representing 25 economies agreed to adopt rules similar to ones the Fed is developing, a united front intended to prevent financial firms from moving transactions offshore in response to tighter Fed rules.

….Unlike earlier Fed margin rules, which focused largely on stock purchases, the new rules being crafted by the central bank would apply to securities-financing transactions, a multitrillion dollar market involving repurchase agreements, or repos, for stocks and bonds, as well as lending of securities.

….Unlike most of the central bank’s regulatory authority, this rule would reach beyond banks and across the entire financial system, affecting investment funds and other nonbank players, reflecting the Fed’s growing concern about what has been called shadow banking.

The tighter that regulations become on banks, the more incentive there is to move transactions into the shadow banking sector.1 That’s why we need rules that apply everywhere. As we learned in 2008, a run on the shadow banking sector is every bit as dangerous as a run on ordinary banks. In fact, since shadow banks are so loosely regulated, shadow runs can be even more dangerous than normal runs.

In any case, this is basically an effort to reduce leverage in yet another corner of the financial industry. That’s a good thing. Pretty much any effort to reduce leverage in any part of the financial sector is a good thing. As I’ve mentioned before, I’d trade pretty much every financial regulation we’ve put in place since 2008 for a simpler, more robust restriction on leverage everywhere and anywhere it occurs. This stuff is boring, but it’s important.

1Commercial banks take short-term deposits and make long-term loans. They are inherently vulnerable to runs since depositors can remove their money anytime they get scared, but banks can’t just call in their loans at will in order to fund all the depositors who want their money.

A shadow bank is any entity that isn’t a commercial bank but acts just like one (borrows short, lends long). By 2008, the shadow banking sector was about as big as the ordinary commercial banking sector, and the shadow banking run in that year was responsible for a large part of the Great Meltdown.

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WHO DOESN’T LOVE A POSITIVE STORY—OR TWO?

“Great journalism really does make a difference in this world: it can even save kids.”

That’s what a civil rights lawyer wrote to Julia Lurie, the day after her major investigation into a psychiatric hospital chain that uses foster children as “cash cows” published, letting her know he was using her findings that same day in a hearing to keep a child out of one of the facilities we investigated.

That’s awesome. As is the fact that Julia, who spent a full year reporting this challenging story, promptly heard from a Senate committee that will use her work in their own investigation of Universal Health Services. There’s no doubt her revelations will continue to have a big impact in the months and years to come.

Like another story about Mother Jones’ real-world impact.

This one, a multiyear investigation, published in 2021, exposed conditions in sugar work camps in the Dominican Republic owned by Central Romana—the conglomerate behind brands like C&H and Domino, whose product ends up in our Hershey bars and other sweets. A year ago, the Biden administration banned sugar imports from Central Romana. And just recently, we learned of a previously undisclosed investigation from the Department of Homeland Security, looking into working conditions at Central Romana. How big of a deal is this?

“This could be the first time a corporation would be held criminally liable for forced labor in their own supply chains,” according to a retired special agent we talked to.

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And it is only because Mother Jones is funded primarily by donations from readers that we can mount ambitious, yearlong—or more—investigations like these two stories that are making waves.

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