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<p>When appropriately conducted, shadow banking can benefit the economy by increasing
the availability of credit to a range of individuals or firms, and provide a valuable
alternative to bank funding. It provides credit and liquidity to the real economy
and can improve efficiency and drive innovation in the financial system through firms
developing expert knowledge in a particular area.</p><p> </p><p>However, the Government
is aware of the risks shadow banking activities pose to financial stability when things
go wrong. The crisis showed that some shadow banking entities created pro-cyclical
build-ups of leverage, did not fully transfer credit risk, were susceptible to rapid
sell-offs, and were very complex. It also became clear that the shadow banking sector
had very complex interconnections with the traditional banking system.</p><p> </p><p>Recognising
the need to improve the transparency and supervision of the shadow banking sector,
the Government has taken steps to improve the way shadow banking entities are regulated.</p><p>
</p><p>Domestically, the Government has created new Financial Policy Committee (FPC)
within the Bank of England to ensure emerging risks and vulnerabilities across the
financial system as a whole are identified, monitored and effectively addressed. In
September last year, the Committee agreed as one of its medium term priorities the
identification and management of potential systemic risks from shadow banking.</p><p>
</p><p> </p><p>At the international level, the Government is actively supporting the
effective regulation of the sector in EU policymaking, and the UK is instrumental
in shaping the global regulatory response at the Financial Stability Board.</p>
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