Will Clinton’s Shadow Banking Plan Do More Harm than Good?
By Ian McKendry
WASHINGTON — Democratic presidential hopeful Hillary Clinton has made reining in the shadow banking system a focal point of her campaign platform, but there are fears that doing so could come with a high price tag for the U.S. economy. While her rival, Sen. Bernie Sanders, D-Vt., has focused on big banks, Clinton has argued that shadow banking risks found in firms like hedge funds and private equity firms were responsible for the financial crisis. She has proposed steps such as giving the Financial Stability Oversight Council more power to target shadow banking activities, enhancing oversight of broker-dealers and improving disclosures. Industry observers give Clinton credit for focusing on a critical issue, but they worry that more regulation could raise costs without making the system safer. Additionally, in terms of dealing with shadow banking activities, it is doubtful that designation of individual firms will adequately address the issue. “You could designate one or another company, but you have done very little to deal with shadow banking risk, because there will always be another company doing the same thing and that has become more widespread,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. But giving the FSOC more authority would also be politically challenging. “You are either faced with strengthening FSOC and making it a much more coherent body than it is right now, which would take new law, or strengthening the nonbank prudential regulators so they would have more safety and soundness powers than they do now,” Petrou said. “Neither of them would be easy sells.”