WASHINGTON, DC – One of the great myths propagated by very large financial institutions is that, if they were to become effectively regulated again, many investors and financial transactions would flee to “shadow banks.”
That sounds bad. Anything that lurks in shadows must have nasty intent, potentially dangerous consequences, or both. And its very shadowiness implies that nothing can be done about it – whatever is there must be beyond the reach of regulation or effective supervision. So perhaps financial-system risk would increase, not decrease, if we regulated very large non-shadow banks properly.