Shadow Banking and Traditional Banking: The Fed Is Now the Permanent Backstop to Both

Bankers, including JPMorgan Chase & Co.’s CEO Jamie Dimon, warn that the Federal Reserve’s proposed stricter capital rules may divert more risks from regulated banks to less-regulated financial entities, often referred to as “shadow banks”. These shadow banks can experience tumultuous runs akin to traditional bank runs, threatening the stability of the financial system. Despite efforts to make the banking system more robust post the 2008 crisis, shadow banking has grown in significance and bears similarities to traditional banking. The Fed’s interventions, such as the standing repo facility, aim to provide support to this system, but it underscores the risks and complexities that shadow banking brings into the financial landscape.