Financial risks grow in shadowy corner of markets, worrying Washington


As rising interest rates shake financial markets, dangers are growing in the “shadow banking system,” a network of largely unregulated institutions that provides more than half of all U.S. consumer and business credit.

The Federal Reserve has lifted its benchmark lending rate this year to its highest level in 15 years, triggering a sharp decline in speculative cryptocurrencies, technology stocks and housing prices.

Now, if the economy plunges into a recession next year as rates continue rising, some regulators fear that problems at unpoliced “shadow banks” could ricochet through the financial system or increase the number of lost jobs.

The Fed hopes to bring inflation under control without causing a recession. And so far, traditional banks like JPMorgan Chase and Goldman Sachs are weathering the storm, thanks to regulations imposed following the 2008 financial crisis that required them to hold more capital in reserve to absorb losses.

But financial risks have not gone away; they have just moved out of the spotlight.

While those regulations made the big banks safer, they did nothing to prevent other institutions, such as hedge funds, insurance companies, asset managers, money market funds and fintech companies, from taking risks. Facing few of the disclosure requirements of deposit-taking banks, these so-called shadow banks binged on borrowed money and acquired assets that could be hard to sell in rocky markets, analysts said.

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