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Brooks Jordan
Professor Gedeon
Money and Banking
Final Essay
5/5/15
1)
There are many challenges that the onset and growth of shadow banking has placed on
central banks. Moe talks about how since the growth of this industry it has become closely
linked to the creation of stricter rules for the regulated side of the banking system. This
means that because of shadow banking, regulated institutions are being put under greater
regulatory pressure. He talks about how intertwined the two parts of the financial system
are through a network of securities lending, rehypothecation and repo- and derivatives
markets. One important idea is that if the growth of the shadow banking system is not
slowed, central banks could become “implicit guarantors” for the liabilities of the shadow
banking. The use and re-use of collateral only increases the pro-cyclical dynamics, and
essentially makes the entire financial system more fragile. Another concern for the central
banks is how, based on a liquidity illusion, has led to an under pricing of the true risk in
