TBTF & Shadow Banking – Krugman’s Perspective

Paul Krugman’s column today does a good 30,000ft overview of the issues we face in reforming the Financial System.

“So why not update traditional regulation to encompass the shadow banks? We already have an implicit form of deposit insurance: It’s clear that creditors of shadow banks will be bailed out in time of crisis. What we need now are two things: (a) regulators need the authority to seize failing shadow banks, the way the Federal Deposit Insurance Corporation already has the authority to seize failing conventional banks, and (b) there have to be prudential limits on shadow banks, above all limits on their leverage.”

While I’m not sure I agree with his thought that “too big to fail” (TBTF) is not as important as “shadow banking”, his point about needing to expand regulation to cover non-traditional banks is well worth considering….

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