Shadow Banking: Are Prudential Regulations A Lost Cause?

The results from the ECB’s stress tests are in and, while no one’s happy that 25 out of 130 banks failed, finding out that Italy, Greece, and Cyprus haven’t finished fixing their financial sectors is hardly a shock. But Guillaume Plantin, Professor of Finance at the Toulouse School of Economics, all these prudential measures meant to stave off the next big crash might be doing more harm than good by redirecting business to the shadow banking system. But instead of trying to regulate shadow banks, he thinks regulators should simply take a step back.

“The main response to the 2008 banking crisis consists thus far of a global trend towards increasing capital requirements for licensed banks, leaving many...