News | Features
1 Jul 2025 11:29
NZCity News
NZCity CalculatorReturn to NZCity

  • Start Page
  • Personalise
  • Sport
  • Weather
  • Finance
  • Shopping
  • Jobs
  • Horoscopes
  • Lotto Results
  • Photo Gallery
  • Site Gallery
  • TVNow
  • Dating
  • SearchNZ
  • NZSearch
  • Crime.co.nz
  • RugbyLeague
  • Make Home
  • About NZCity
  • Contact NZCity
  • Your Privacy
  • Advertising
  • Login
  • Join for Free

  •   Home > News > Business > Features

    Beware of the Shadow Banks

    “Irrational exuberance” became the defining term of the dot.com age in the late 1990s.
    Now a new phrase has been coined, which I believe will become the defining term of the 2010s: “ The shadow banking system”.


    Investment Research Group
    Investment Research Group
    Devised by US economist Paul Krugman, the term refers to entities that have taken on banking tasks such as creating credit but are not subject to banking regulations. These unregulated entities are most likely to have caused the credit crisis.

    He comes to this conclusion after reviewing the six most common reasons given for why the crisis occurred.

    These are:

    Size: Some financial institutions became too big to fail

    Shadows: Institutions that fulfilled banking functions evaded regulation

    Opacity: There were too many complex financial instruments that most people didn’t understand

    Predation: Financial firms deliberately misled consumers and investors

    Government intervention: Governments encouraged lenders to make bad loans, especially to the poor

    Monetary mismanagement: The Federal Reserve kept interest rates too low for too long.

    Looking at the size issue, he notes there was a massive increase in financial concentration, with a few true gigantic banks emerging.

    Shadows: Deregulation allowed various entities to engage in core banking activities while escaping banking regulations. However, such institutions were equally vulnerable to a ‘run on the bank’.

    Opacity: The emergence of securities and contracts with obscure, hidden risks

    Predation: Krugman finds it no coincidence that the most complex, confusing loans were offered to those least able to understand them. There was probably also a substantial amount of deliberate selling of mortgage-backed securities to investors who didn’t grasp the risks.

    Having identified shadow banking as the main culprit, Krugman looks at how effective proposed reforms will be.

    One suggestion is to reduce government intervention and rely on market discipline. However, this may not work. In 1930 the USA let banks fail – and the result was the Great Depression.

    A second version of reform calls for increased regulation, including a return to the post-Depression enforced separation of deposit and investment banking.
    Krugman doesn’t think this is realistic. “Shadow banking isn’t going away. Like it or not... short-term debts now play a role in our economy comparable to that of bank deposits.”

    The third option is to extend regulation to shadow banks.

    If a regulator had the capacity to seize shadow banks like it can with depository institutions, that might help the problem.

    However, regardless of what actions are taken, Krugman admits he is “not wildly optimistic” that any form of regulation can prevent another crisis.

    © 2025 David McEwen, NZCity

     Other Features News
     10 Sep: Spring clean your finances
     13 Aug: Plan ahead to give yourself a debt-free Christmas!
     10 Jul: Wise up to clear credit card debt
     07 May: Ways to prepare for the unexpected
     30 Mar: Time for a financial progress check
     10 Feb: Studying up on NZ Super
     10 Jan: Managing the back-to-school bills
     Top Stories

    RUGBY RUGBY
    Levi Aumua is departing the Crusaders after two Super Rugby seasons More...


    BUSINESS BUSINESS
    China's EV newcomer Xiaomi sells nearly 300,000 SUVs in an hour More...



     Today's News

    National:
    Trump’s worldview is causing a global shift of alliances – what does this mean for nations in the middle? 11:17

    International:
    Musicians like Abel Selaocoe are broadening classical music to reflect our evolving stories 11:17

    Cricket:
    Nathan Lyon has brought an end to his era as the Australian test cricket team song-master, a role he inherited from Mike Hussey more than 12 years ago 11:07

    Cricket:
    Black Cap Ish Sodhi's desperate to show his spinning evolution after earning a reprieve under incoming coach Rob Walter 10:47

    Environment:
    Warmer seas are fuelling the dangerous ‘weather bomb’ about to hit NSW 10:37

    National:
    Understanding the ‘Slopocene’: how the failures of AI can reveal its inner workings 10:27

    Rugby League:
    Warriors' reserve grade play-maker Tanah Boyd views himself as a logical replacement for injured halfback Luke Metcalf 10:27

    National:
    Sudan: foreign interests are deepening a devastating war – only regional diplomacy can stop them 10:17

    Law and Order:
    A 31-year-old man's been charged with wounding with intent to cause grievous bodily harm in relation to a homicide investigation in South Auckland's Otahuhu 10:07

    Soccer:
    All Whites striker Ben Waine has completed a move from the south of England to the Midlands 10:07


     News Search






    Power Search


    © 2025 New Zealand City Ltd