Shadow banks are too big to stay in the shadows

WHEN it is finally completed seven years from now, Citadel’s New York tower will be the second-tallest building in the city, after the World Trade Centre. It will also loom over the headquarters of JPMorgan Chase just a few hundred metres south along Park Avenue.

That the world’s most valuable bank will be literally in the shadow of a key pillar of shadow banking is an overt and irresistible metaphor for how financial power has shifted over the last 15 years – from traditional lenders towards enormous, less restrained repositories of money, such as Citadel.

Shadow banks do a lot of the work that commercial banks do without being hampered by strict government regulations. That means these operations – particularly, hedge funds and private asset managers – can invest more aggressively, taking on greater risks and potentially earning greater rewards.