Supervisors seek to manage shadow banking risks

Chasing shadows

It’s a lesson children learn early: if you squeeze a lump of dough or a ball of clay, its volume doesn’t actually shrink – it just gets redistributed. The same is true of financial system risk. But while a child’s experiments may result in a lumpy biscuit or a wonky giraffe, redistributing risk within the financial system is a far more dangerous exercise.

Regulators have started by squeezing the banking industry in the form of new capital and liquidity rules – but it’s not obvious where the risk