America’s Shadow Banks Need Some Attention, Too

Regulators are rightly scrambling to address emerging weaknesses in the US banking system. As they do so, they mustn’t lose sight of the potentially greater risks gathering in its shadows.

The term “shadow banking” refers to a broad array of financial institutions that (among other things) issue money-like instruments and make loans. They don’t face the same level of scrutiny as traditional banks, but — to the extent they depend on flighty short-term funding — they’re no less susceptible to panics. In 2008, runs on various nonbank entities, ranging from obscure investment conduits to Lehman Brothers Holdings Inc., transformed an already bad financial crisis into the worst since the Great Depression.