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Britain's shadow banking system is raising serious concerns after bond market storm

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After last week's chaos in British bond markets following the government's Sep. 23 'mini-budget,' analysts are sounding the alarm on the country's shadow banking sector.

Harriss suggested that the U.K. is not there yet, however, for there is still ample liquidity in the system for now.

The greater the debt held by non-banking institutions, such as hedge funds, insurers and pension funds, the higher the risk of a ripple effect through the financial system. The capital requirements of shadow banks is often set by counterparties they deal with, rather than regulators, as is the case with traditional banks.

Pension funds triggered the Bank of England's action last week, with some beginning to receive margin calls due to the plunge in gilt values. A margin call is a demand from brokers to increase equity in an account when its value falls below the broker's required amount.

 

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