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September 3, 2007
The First Non-Bank Bank Run
In a speech at the Jackson Hole economic conference this weekend, Bundesbank president Axel Weber did a nice put of putting into words what is really going in financial markets. Call it the first "non-bank bank run".The current turmoil in the financial markets has all the characteristics of a classic banking crisis, but one that is taking place outside the traditional banking sector...The ever-quotable Paul McCulley of Pimco went on to call it a "run on the shadow banking system".
...Mr Weber told fellow central bankers and economists at the Federal Reserve’s Jackson Hole symposium that the only difference between a classic banking crisis and the turmoil under way in the markets is that the institutions most affected at the moment are conduits and investment vehicles raising funds in the commercial bond market, rather than regulated banks.
These entities were inherently vulnerable to a sudden loss of confidence on the part of their funders because “there is a maturity mismatch” on the part of financial institutions that have invested in long term mortgage-backed or asset-backed securities using short-term finance.
[via FT]
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