The Policy Train Chasing Shadow Banking
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This chapter takes a step back and asks the question what happened when the dust settled after the financial crisis of 2007–2009. There was time for analysis and reflection. But then it was time to take action based on those findings and experiences. But where to start in a complex domain with many issues that require attention? And does dealing with the 2007–2009 issues solve the deeper root-cause problems? If we don’t want to go down the road of fixing the symptoms, what are then the underlying objectives? Financial stability, liquidity, risk neutralization, keep credit flowing at all times and so on. And what are the best tools to achieve those objectives? Ex ante regulation is needed but inherently insufficient; ex post regulation is to ensure that things are cleaned up as soon as possible and markets don’t stay instable longer then absolutely needed. And how does regulation relate to macroprudential and monetary policies that carry the same objective? And can supervision and stress testing contribute to those joint objectives? An analysis of what happened and the decisions made in the financial industry and the different shadow banking segments is the subject of this chapter.