The appropriate policy response is not to lower prudential standards for banks, but to ensure adequate standards for shadow banks. Financial sector regulation needs to take a more encompassing view of the financial system.
Shadow banks — including hedge funds, money market funds, finance companies and others — are financial intermediaries that take money from investors and lend it but that do not receive the regulatory treatment banks do. These institutions now account for $15-25 trillion in assets in the U.S., the report noted, amounting to an estimated third of U.S. systemic risk.
Read the IMF report.