THE REGULATORY CHALLENGE OF FINANCIAL DISINTERMEDIATION AND MARKET VOLATILITY – ANALYSIS, CRITICISM AND ALTERNATIVES TO THE POST-CRISIS STRATEGIES OF MANAGING SYSTEMIC RISK WITHIN THE SHADOW BANKING SECTOR

The failure to fully come to grips with the shadow banking system has rightly been described as one of the most glaring weak spots in financial reform thus far: the run by novation in the OTC derivatives market and the consecutive freezing of the repo and commercial paper market in the case of Bear Stearns, the fall of Lehman Brothers as a result of defaults on acquired securitized notes, the rescue of AIG due to the unknown identities of its CDS counterparties and the necessity to bail out the money market fund industry to prevent bank-like runs have impressively proved that the regulation of the shadow banking sector is far from able to avoid the realization of systemic risk causing negative externalities that harm the global society at large. The Financial Stability Board (“FSB”), The Federal Reserve Bank of New York (“Fed”), the International Organization of Securities Commissions (“IOSCO”) and numerous authors have made proposals of how to ameliorate the currently existent weaknesses, some of which have been implemented by national and supranational economic policy makers. While a reaction to the financial crisis is welcome, both the regulation of the individual components of the shadow banking sector as well as the regulation of the shadow banking sector as a whole as designed after the crisis have their weaknesses.

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 ISSN(O): 2347-3827

© Rajiv Gandhi National University of Law Punjab, 2020