The global financial crisis and changing beliefs The recent global crisis has shaken many of our beliefs about economics and economic policy. Prior to the crisis, many of us talked about the so-called “Great Moderation,” believing that macroeconomic volatility had declined substantially in most advanced economies over the past two decades.
The systemic risk arising from the shadow banking sector cannot be easily ring-fenced. This is because of the interconnectedness of shadow banks with the regulated part of the financial system. Stress in the shadow banking sector can be transmitted to the banks both through direct and indirect channels: banks’ exposures to shadow banks through equity investments, credit claims or liquidity lines.