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FSA chief calls for radical action on shadow banking

Lord Adair Turner uses lecture at Cass to warn $47 trillion sector must be reined in

Shadow banking poses a major threat to global financial stability and should be more closely supervised and regulated, the Chairman of the Financial Services Authority, Lord Turner, said in a speech at Cass last night.

The shadow banking sector, which encompasses an array of non-banks that extend credit and provide other bank-like services, is potentially very "unstable" and vulnerable to liquidity shocks, he told students, alumni and City professionals in the latest of the Dean's Lecture Series.

Lord Turner, who is also a Visiting Professor at Cass, said shadow banking "is not something parallel to and separate from the core banking system, but deeply intertwined with it ... We need to ensure that our regulatory response appropriately covers shadow banking as well as banks.

"This time we need to ensure that we are sufficiently radical. But also not fool ourselves that any set of reforms we can now design will be sufficient to make the system permanently safe."

Lord Turner went on to say that regulators at the Financial Stability Board, a group of 20 leading economies he heads up, are committed to proposing tougher rules for shadow banking by the end of the year. Its recommendations may include capital charges and curbs on a bank's exposure to shadow banks.

Shadow banking, which includes money market funds, conduits, securitisation lending and repos, is estimated to be worth $22 trillion in Europe, and $25 trillion in the US.

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