STEVE INSKEEP, HOST:
Let's listen to an effort to broaden the debate over banking. Presidential candidate Bernie Sanders says that if he is president, one of his first acts will be to break up big banks. His Democratic rival, Hillary Clinton, says big banks are just part of the problem. And she focuses a lot on what's called shadow banking. As NPR's Jim Zarroli reports, the shadow banking system contains trillions of dollars in assets, much of it held by financial firms like hedge funds, which are less regulated than traditional banks.
JIM ZARROLI, BYLINE: Hillary Clinton has faced plenty of criticism about her ties to the financial industry. And she has responded with a series of proposals that she says are meant to get tough on Wall Street. At a recent town hall in New Hampshire, Clinton said going after the big banks isn't enough to prevent the kinds of activities that sank the economy in 2008.
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HILLARY CLINTON: There were a lot of bad actors. And if all you do is look over here, I'm telling you, they're going to be over there in the shadow banking sector just cooking up all kinds of ways to once again put our economy at risk.
ZARROLI: Just what constitutes the shadow banking sector is open to some interpretation. But it's generally considered to consist of financial institutions that perform a lot of the same functions as banks without being regulated the same way. Dennis Kelleher, who heads the reform group Better Markets, says money market funds are one example.
DENNIS KELLEHER: They are sold and marketed as incredibly stable funds where you put in a dollar you get a dollar out. But there's no guarantee of that. And there's no deposit insurance of that as there is in a regulated bank.
ZARROLI: Like banks, money market funds take in money from customers and then lend it out again by buying bonds, for instance. But unlike commercial banks, their holdings aren't insured. The same is true of hedge funds and private equity firms. NYU economics professor Lawrence White says, in a crisis, of a lot of people could try to withdraw their money from these places at the same time.
LAWRENCE WHITE: If the holders of those short-term claims on these shadow banks start to become nervous, we can see runs. And that's exactly what happened in 2008.
ZARROLI: Some people say these shadow banks represent a big potential liability for the financial system and for the economy. And Clinton has proposed steps to regulate these shadow banks more tightly, such as requiring certain funds to hold more capital on hand. For his part, Bernie Sanders doesn't emphasize shadow banking as much. But he says his overall platform would be much tougher against Wall Street than Clinton's would be. Lawrence White says Clinton has a point. Shadow banking is still risky.
WHITE: But that shouldn't blind us to the fact that the regulatory system is much tougher and robust today than it was eight years ago - no question in my mind about that.
ZARROLI: White says, for example, the Dodd-Frank financial overhaul bill set up an oversight council that can actually shut down firms that pose a risk to the system. Even so, White says, the regulatory changes probably haven't gone far enough. Anat Admati, finance professor at Stanford, says Clinton overlooks the fact that there are already regulations on the books to address the risks of shadow banking. It's just that regulators don't always enforce them.
ANAT ADMATI: Yes, we know that there are all these risks, but we also have some tools to deal with them right now. So what is she saying to the fact that the regulators are not doing it right now?
ZARROLI: Admati also notes that shadow banking shouldn't be viewed as separate from the rest of the banking system. Many large bank holding companies own hedge funds and money market funds. So they're deeply involved in shadow banking, too. And the bigger those banks get, the riskier they are to the financial system. Jim Zarroli, NPR News, New York.
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