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 policymakers struggle to reopen their economies amid 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.
There's a lot at stake should the scrutiny lead to tougher oversight. The alternative financiers are major providers of credit to households and companies, making their smooth functioning critical to the health of financial markets and the economy.
Non-banks are marshaling their lobbyists in Washington to argue that casting blame on the industry is misplaced. A point in their favor is that unlike Wall Street banks a decade ago, shadow lenders didn't cause the recent meltdown. Instead, the financial-market stress was triggered by a health crisis.