U.S. Federal Reserve Chairman
Speaking at the
"By way of comparison, it is not especially uncommon for one day's paper losses in global stock markets to exceed the losses on subprime mortgages suffered during the entire crisis," Bernanke said.
He said the collapse of the housing market since the financial crisis has erased
The dot-com fiasco "resulted in a relatively short and mild recession and no major financial instability," he said.
What then caused the financial rupturing that threatened major banks across the country and seized up lending?
In part all of the above, but in part, "shadow banking," Bernanke said.
"Banks … (as they) rely on short-term funding and leverage, they benefit from a government-provided safety net, including deposit insurance and backstop liquidity provision by the central bank. Shadow banking activities do not have these safeguards," he said.
Modern banking was a major cause the financial system collapsed, Bernanke said.
He defined shadow banking as transactions that "fall outside of traditional" safety nets.
"Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper conduits, money market mutual funds, markets for repurchase agreements (repos), investment banks, and mortgage companies," he said.
He emphasized shadow banking represented a growing portion of the financial system that had no established regulatory protections.
"Indeed, the very foundation of shadow banking and its rapid growth before the crisis was the widely held view (among both investors and regulators) that these safeguards would protect shadow banking activities against runs and panics, similar to the protection given to commercial banking by the government safety net. Unfortunately, this view turned out to be wrong," he said.
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