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.

One More Thing

And it's a big one. Mother Jones is launching a new Corruption Project to do deep, time-intensive reporting on the corruption that is both the cause and result of the crisis in our democracy.

The more we thought about how Mother Jones can have the most impact right now, the more we realized that so many stories come down to corruption: People with wealth and power putting their interests first—and often getting away with it.

Our goal is to understand how we got here and how we might get out. We're aiming to create a reporting position dedicated to uncovering corruption, build a team, and let them investigate for a year—publishing our stories in a concerted window: a special issue of our magazine, video and podcast series, and a dedicated online portal so they don't get lost in the daily deluge of headlines and breaking news.

We want to go all in, and we've got seed funding to get started—but we're looking to raise $500,000 in donations this spring so we can go even bigger. You can read about why we think this project is what the moment demands and what we hope to accomplish—and if you like how it sounds, please help us go big with a tax-deductible donation today.

We Recommend

Latest

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.

Subscribe

Support our journalism

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

Donate