FSA chairman Adair Turner says the shadow banking system played a major role in the financial crisis and needs to be regulated effectively.
Turner says the shadow banking system did not run parallel, but had instead become linked to the regular banking system.
He says the regulators will have to ensure that they approach the shadow banking system in the same way.
According to Turner, researchers have estimated that the shadow banking system – comprised of securitised lending, hedge funds, investment bank trading in credit securities and issuance of asset-backed commercial notes – has grown to $20 trillion in the US and $13 trillion in Europe.
The FSA chairman says: “We need to understand shadow banking not as something parallel to but separate from the core banking system, but deeply intertwined with it.
“The way in which shadow banking contributed to financial instability reflected and still reflects fundamental developments in our financial system which are relevant to banks as much as to shadow banks, which remain important today and which could produce new problems in the future.”
He adds: “We should not take the decline in some specific indicators of shadow activity which has occurred since 2008 as suggesting that the risks have gone away.”