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

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.


Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do.

Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2019 demands.

We Recommend


Sign up for our newsletters

Subscribe and we'll send Mother Jones straight to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.


Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.


We have a new comment system! We are now using Coral, from Vox Media, for comments on all new articles. We'd love your feedback.