The Rise of Shadow Banks and the Repeal of the Glass-Steagall Act

Traditional commercial banks have been the driving force for creating liquidity in the economy. They accept the illiquid liabilities of both nonfinancial and financial entities for their own liquid liabilities and have access to the emergency funding of the Federal Reserve.

The shadow banking system, in contrast, introduced activities that generated liquidity through capital markets without public guarantees and provided access to the central bank as the “lender of last resort.” Unlike traditional commercial banks, shadow banks are unregulated and not subject to the traditional banking regulation system. This means that they cannot borrow in an emergency from the Federal Reserve

Thanks. God bless.


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