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Friday, July 22, 2011

Dodd-Frank Moves the Ball Forward, but Shadow Bank Runs are Still a Potential Problem

I have a few comments on the Dodd-Frank financial reform legislation in a post at Public Radio's Marketplace:

Dodd-Frank Improves Regulation, But Shadow Bank Runs are Still a Potential Problem

One thing I didn't have space to talk about -- I pushed beyond the suggested word limit as it was -- is the doubts I have about whether the resolution authority granted in the legislation will work. The hope is that by having plans ready in advance to dismantle large systemically important financial institutions and the ability to force firms to execute those plans, large disruptions to financial markets can be avoided when these firms are in danger of failing. However, if doubts exist about whether this will stop bank runs, then it will be best not to take a chance on leaving shadow system deposits in place that might be vulnerable, and the problem of bank runs in the shadow banking system will still be present.

I also didn't say as much as I could have about why I think the regulation is too weak in many places, see here for more.

    Posted by on Friday, July 22, 2011 at 03:06 PM in Economics, Financial System, Regulation | Permalink  Comments (3)


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