Federal Reserve officials, fresh from the latest round of tests designed to ensure the safety of the biggest banks, are now peering into the darker corners of the financial system as they assess the risks of another crisis.
One source of concern: Tighter regulation of banks is prompting more borrowers to seek funding through the US$25 trillion shadow banking system—money-market mutual funds, hedge funds, brokerages, and other entities that face fewer restrictions.
"These institutions are a significant and growing source of credit in the economy," Dennis Lockhart, president of the Atlanta Fed, said in a March 20 speech. "They are part of an interconnected financial system that, in extreme circumstances, is prone to contagion."
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