In his October 6, 2011 testimony before the before the US Congress’s Committee on Banking, Housing, and Urban Affairs, Treasury Secretary Timothy F. Geithner made it clear that shadow banking remains an an area of great concern on his regulatory agenda. Geithner testified that "shrinking the shadow banking system" is a major item in the Department of the Treasury's recent regulatory successes. This testimony, coupled with his other recent statements makes it clear that that he hopes to see the shadow banking system further reduced.
Because of the actions we have taken to repair and reform our system:
- The weakest parts in our financial system - the entities that took the most risk - no longer exist or have been significantly restructured.
- The firms that survived are better capitalized - large banks have increased common equity by over $300 billion since the beginning of 2009. And the level of common equity to risk weighted assets across these banks is now approximately 10 percent, up from six percent at the beginning of 2009.
- Banks are funding themselves more conservatively and are maintaining much larger cushions of safe and liquid financial assets. Debt maturing in one year or less at the largest institutions, as a share of total liabilities, has declined dramatically to roughly 40 percent of the pre-crisis level.
- The major banks have reduced the size and overall risk in their balance sheets, resulting in a substantial decrease in leverage - a major source of risk - compared to pre-crisis levels.
- The “shadow banking system” - the financial firms that operate outside of a framework of oversight and prudential regulation - is much smaller, with assets at roughly half the level of 2007. (emphasis added)
These improvements are very significant. Together they represent more progress on the path to a more stable and resilient financial system than has been achieved in the other major economies.
Notable amongst these improvements is Geithner’s assessment of the current size of the shadow banking system. With Fed estimates putting the gross size of the liabilities of the shadow banking system at nearly $20 trillion in March 2008 and $16 trillion in the first quarter of 2010, shadow banking remains an important source of credit for the real economy and critical to the credit markets underpinning the financial system as a whole. Though the gross magnitude of the shadow banking system is greatly reduced from its size prior to the financial crisis, its liabilities still dwarf those of the traditional banking system.
It is no secret that Mr. Geithner places significant blame for the freezing of credit markets in 2007 on a "run" on the entities in the shadow banking system by their counterparties. Given its relative size and importance to the global financial system, it seems that shrinking shadow banking, or at least bringing in out of the shadows, remains squarely on the regulatory agenda for Mr. Geithner.