"Modern banks operate in
a complex global financial ecosystem. This column argues that proper regulation
requires an updating of our ideas about how they operate. Modern banks finance
bond portfolios with uninsured money market instruments, and thus link cash
portfolio managers and risk portfolio managers. Gone are the days when banks
linked ultimate borrowers with ultimate savers via loans and deposits. The Flow
of Funds should be updated to reflect the new realities.
Regulatory reform has focused on banks and how much liquidity and capital they should hold, rather than on the evolution of the broader financial ecosystem that banks are only a part of. However, understanding this ecosystem is imperative, as it can influence the types of activities banks engage in and the types of liabilities they issue."
Regulatory reform has focused on banks and how much liquidity and capital they should hold, rather than on the evolution of the broader financial ecosystem that banks are only a part of. However, understanding this ecosystem is imperative, as it can influence the types of activities banks engage in and the types of liabilities they issue."
