The added risk had not been compensated by higher capital

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Reference no: EM131303250

In a paper written in April 2010, looking back at the financial crisis, former Fed Chair Alan Greenspan argued:

At least partly responsible [for the severity of the financial collapse] may have been the failure of risk managers to fully understand the impact of the emergence of shadow banking that increased financial innovation, but as a consequence, also increased the level of risk. The added risk had not been compensated by higher capital.

a. How did the emergence of shadow banking increase the risk to the financial system?

b. What does Greenspan mean that "the added risk had not been compensated by higher capital"? By holding more capital, what problems could shadow banks have potentially avoided?

Reference no: EM131303250

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