As the politicians in Washington increasingly regulate banks, money market funds, private investment companies and hedge funds are profiting.
They don’t have the same regulations as banks do.
Banks are among the most tightly regulated businesses. Other businesses can invest as they wish. Banks are regulated. They can’t just lend to the people they want to do lend. They have to lend to minorities who are bad credit risks or politicians and bureaucrats will crack down on the banks.
I would go out of my mind if I was as regulated as a bank. Imagine if politicians and bureaucrats monitored my blog posts for fairness and diversity. I’d be in big trouble. There’s no way I’d want to put up with regulators breathing over my shoulder. But banks have to put up with this.
In the aftermath of the financial crisis, the Dodd-Frank Act, which was enacted last July, imposed new restrictions on crucial bank profit centers, including proprietary trading, derivatives trading and mortgage lending. International regulators are also crafting new capital and liquidity requirements.
The rules do not apply to the broad range of firms that comprise the shadow-banking industry. And because these firms are not entitled to deposit insurance or Federal Reserve support, they are free to set their own capital levels.
“These differences create opportunities for borrowers and lenders to pursue the cheapest-cost, least transparent source of capital,” the report said.
This flexibility, S.&P. said, will also allow shadow firms to take on new lines of business that the banks are forced forgo. The servicing business for home loans, for instance, may be pushed further into the shadow-banking system, according to the report, which added that shadow firms “have begun to fill the void and may continue to do so.” Meanwhile, investors seeking an opportunity for high returns may throw more money into shadow-banking firms.