Federal regulators need to craft judicious oversight of the growing "shadow banking" sector, said Dennis Lockhart, the president of the Atlanta Fed, on Friday. In a speech at the University of Georgia, Lockhart said "selective supervision and regulation [of the sector] is both possible and desirable" somewhere between "complete exemption from prudential regulation and a wholesale extension of the existing framework of regulation developed for banks." Lockhart said a perfect definition for shadow banking is elusive. He said the term generally means firms engaged in "credit intermediation" and they often compete with banks for business but have less regulation. The term encompasses broker-dealers, mortgage lenders and money market mutual funds, which alone has $2.7 trillion of liabilities. "Shadow banking activity is large, growing and opaque," Lockhart said. "At a minimum, I feel the authorities responsible for preserving financial stability must monitor the sector very closely with ever-improving techniques."
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