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Fed Headed for a Clash With Hedge Funds, Other Shadow Banks

  • Global central banks push tougher oversight after March tumult
  • Industry is mobilizing lobbyists to head-off new constraints

Photographer: Oliver Douliery/AFP via Getty Images

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The Federal Reserve and other central banks are heading for a collision with shadow lenders -- the firms with a sinister nickname that are increasingly dominating global finance.

Even as policy makers struggle to reopen their economies in the midst of the coronavirous pandemic, they’ve launched a review of what went wrong with markets in March, when a worldwide dash for cash by investors nearly crashed the financial system and forced unprecedented rescue actions by central banks. Their focus is on loosely regulated money market and hedge funds, mortgage originators and other entities. Already, some watchdogs have pointed to highly leveraged trades involving U.S. Treasuries as one source of the turmoil.

“In many cases they have reached systemic importance,” Bank for International Settlements General Manager Agustin Carstens said of the non-banks. He added that it’s time to move toward more regulation.