Source: MarketWatch

Brokers threatened by run on shadow bank system
Regulators eye $10 trillion market that boomed outside traditional banking
By Alistair Barr, MarketWatch

Last update: 2:37 p.m. EDT June 20, 2008SAN FRANCISCO (MarketWatch)

-- A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.


Big brokerage firms like Goldman Sachs which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation.

The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.

While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn't have reliable access to short-term borrowing during times of stress.


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