Shadow banking precursor to another 'Lehman Weekend'

By Marc Castro

Sep 15, 2013 11:14 PM EDT

Five years ago, the so-called "Lehman weekend" had become the fulcrum of the financial crisis but its roots were broad and deep. The unfettered excess on Wall Street and the blind eye of financial regulators had brought about the crisis whose effects are felt until today.

Now, there are still many areas that regulatory reform had not touched on since those fateful days five years ago. These include 'shadow banking' or the allowed engagement of highly leveraged, short funded maturity transformation with very little transparency. This is a transaction that does not have enough capital to cover it as well as little oversight. Now, more and more companies are becoming more interconnected and reliant on these short term funding sources from derivatives, money market funding, repo transactions, securities lenders and brokerage businesses. In these transactions, huge risks are assumed outside the regulatory coverage of banking transactions as this area would prove to be easier to navigate, leverage and complete.

There is a clear and present risk that this area of finance would replicate the ills of the "Lehman Weekend", If there is a collective amnesia as to the roots of the crisis, then there would be further weakening and even loss of gains brought about by regulatory reform. If the unfettered actions, especially in the area of 'shadow banking' is allowed, then there would be no surprise if five years from now, another 'Lehman Weekend' occurs.

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