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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

Which feature of the shadow banking system most contributed to systemic vulnerability in the 2007-2009 crisis?

Shadow banks performed maturity and liquidity transformation using short-term funding but lacked deposit insurance and central bank backstops. That made them vulnerable to runs, and their links to regulated banks spread losses across the financial system.

  1. AMaturity transformation funded by short-term liabilities without access to central bank liquidity facilities or deposit insuranceCorrect
  2. BStrict capital requirements identical to those of commercial banks
  3. CFunding mostly through insured retail deposits
  4. DA lack of linkages with the regulated banking sector

Explanation

Shadow banks conducted maturity and liquidity transformation but lacked deposit insurance and lender-of-last-resort access, so they were exposed to runs. Their strong ties to regulated banks, often through liquidity support and sponsorship, transmitted stress to the wider system.

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