Investors interested in money market funds, government-sponsored enterprises and asset securitizations are seeing signs of shadow banking emerging from the shadows, but more work has to be done to create transparency and oversight of the segment, Standard & Poor’s said in a new report.

“Investors seem to be asking two key questions about shadow banking,” said S&P credit analyst Rodrigo Quintanilla. “The first is to what extent shadow banking might replace traditional banking in the U.S. financial sector.” 

He claims the second question is whether regulators can put a supervisory framework in play to ensure systemic risks are handled.

The S&P report says shadow banking looks on the surface like traditional banking, but investors now realize that it does not come with any type of guarantee that is available to depositories.

The S&P report says investors were not clear on this distinction prior to the meltdown.

“Now, regulators are attempting to establish better oversight over the shadow banking sector to lower the possibility of future interventions, to reduce contagion to the formal banking sector, and to eliminate reliance on government support,” said Quintanilla. “In fact, many of the proposed regulatory reforms aim to increase investors’ risk sensitivity and better align incentives among investors, originators, and intermediaries.”

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