Of Special Interest


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8th November 2011

Growth in shadow banking worldwide

Vikram Pandit, Citigroup CEO and former hedge fund manager, agreed banks should not be involved in principal trading and highlighted the growth in shadow banking.

Pandit was speaking at the Securities Industry and Financial Markets Association Annual gathering on Monday. He started first by seeming to agree with the controversial Volcker rule banning banks from engaging in Principal trading, speculating using their own capital. He then went on to say that it was difficult to set the boundaries between what should and should not be allowed. After which he observed that shadow banking, was growing fast. These are institutions such as hedge funds that can invest using their own capital and do not face the tough regulatory regime and capital restrictions of banks. He went on to explain this was not just a US phenomenon as a result of the Volcker rule but a world wide trend. Specifically he suggested that up to 50% of China's financial markets could be classified as shadow banking.

Another point he made was that a major difference between the 2008 banking crisis and now is the degree of bank leverage. Whilst banks are still in the process of de-leveraging the position was much better now than in 2008.