Supervisors seek to manage shadow banking risks

New capital and liquidity rules may force risk outside the banking industry – an intended consequence of the regulations. But is this a good thing, and how will supervisors monitor the complex, shadowy ways in which risk can be transferred and transformed? By Duncan Wood

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