This report focuses on shadow banking and the too-big-to-fail issues. The main recommendation addresses the regulation of the shadow banking system. The authors suggest a “demarcation rule” which defines the permissible business transaction partners of regular banks and other regulated financial institutions. A strong version of the demarcation rule would require all counterparties of regulated financial institutions to be properly regulated as well. By way of indirect regulation, shadow banks would,in order to continue their business model, have to adopt structures – legal, organizational, and financial – bringing them under the umbrella of the regulated industry. A second recommendation refers to the build-up of a comprehensive data set of financial interrelationships in markets. Lastly, the authors recommend addressing the obstacles hindering restructuring legislation to be effective in many countries today.
White Paper No. 04, 2012
