As some of the recent reports have pointed out, the two concerns relating to “outside perimeter” entities that contributed to the current crisis were: (i) maturity transformation being undertaken by these entities, which traditionally used to be a function of banks; and (ii) the systemic leverage resulting out of the hugely leveraged positions of these entities, either through direct borrowing from banks or through the funding markets.
The central issue in both the above is the interaction between the unregulated entities and the formal regulated funding channels, essentially banks and money markets. The maturity transformation primarily entailed heavy reliance by these entities on short term funds for funding long term assets.