The Financial Crisis Revisited: Not Banks but Regulatory Failures of Banking

While most studies analysing in great detail the origins of the current financial crisis concentrate on banks, little attention has been given to the mechanisms and role of shadow banking. In this contribution the role of money market funds, commercial paper and securitization in the growth of financial intermediaries operating in the shadow of the regulated banking sector is documented. It follows that micro-prudential regulatory arbitrage and ineffective oversight at the macro-level contributed significantly to the extent of the crisis, mainly attributable to the de-supervision that occurred. It is concluded that a more systemic-risk oriented approach towards regulation and supervision is needed. This approach is to be complemented by more specific risk based corporate governance for banks and other financial intermediaries, as well as by better governance of the regulatory and supervisory framework.