Alternative Approach to Risk Mitigation

The issue of shadow banking system became a global phenomenon originating from the USA due to financial crisis. It is believed by many researchers that interest rates were kept too low for too long by the Federal Reserve Bank in the early year 2000. This, of course, has caused credit boom in the economy. Thereby, this situation led to the post-2007 financial and economic crisis. However, low interest rates during boom period of early 2000s were not the only reason for the financial crisis. In fact, many academicians and policymakers raised an argument that the crisis was result of the interaction of micro- and macrofactors. It is true that shadow banking system bears the same risk as banks. As stated by Financial Stability Board (2011), shadow banking system raises concern about systemic risk and concerns about regulatory arbitrage. After FSB 2010, 2011, and 2012 reports, FSB published final policy documents on Strengthening Oversight and Regulation of Shadow Banking in August 2013 to mitigate potential systemic risks associated with shadow banking. Therefore, the aim of this research is to search for alternative approach to risk mitigation to address potential systemic risk associated with shadow banking.