ABSTRACT
The depth and length of the current financial crisis have been exceptional. The global financial system was close to a meltdown after Lehman Brothers filed for bankruptcy in September 2008. Central banks responded with unprecedented force and were able to restore stability to financial markets. The shadow banking system represents a special policy challenge for central banks, since its growth is closely linked to the introduction of stricter rules for the regulated banking system. The two parts of the financial system are also closely linked through a network of securities lending, rehypothecation, and repo- and derivatives markets. Banks are big players in the shadow banking system, both as collateral providers and as repo participants. Money market funds are major funding sources for the big banks, and the over-the-counter (OTC) derivatives market is an integral part of the shadow banking system through its extensive reliance on pledged collateral.
