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When Rates Rise: Risks To Global Banks Could Emerge From The Shadows

After several years of substantial growth, tighter funding conditions and weaker macroeconomic conditions will likely slow down global shadow banking activity. Shadow banks operating with high leverage, running structural liquidity mismatches, or taking significant asset-quality risk could face financial pressure, particularly if their economies enter recessions. Traditional banks' direct exposure to shadow banks appears limited, at less than 3% of total bank assets. That said, indirect contagion risks--for example, from the failure or rapid deleveraging of one or more large shadow banks--could spell trouble for the broader financial sector and ultimately affect traditional banks.


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