ABSTRACT
The shadow banking system enjoyed meteoric growth not merely because it served the valuable economic functions described in the previous chapter – credit provision and credit risk transfer, maturity and liquidity transformation, credit transformation, and the creation of money instruments. The system flourished, moreover, because the federal government granted each of the shadow banking markets various legal subsidies and preferences to stimulate their growth. Furthermore, financial institutions designed and deployed shadow banking instruments to engage in systematic regulatory arbitrage of banking and other financial regulations. Asset-backed securities, money market funds, repos, and credit derivatives did not gestate in a legal vacuum merely to serve economic needs. Rather, law played a crucial role in the procreation, midwifing, and feeding of the various shadow banking markets. As the previous chapter explained, the urge to use regulatory subsidies and lower regulatory taxes formed part of the system’s DNA, molecular structure, and very reason for existence.
