resulting fire sales recalled the asset liquidations by some trust companies during the panic of 1907 and by some securities firms in the 1930s. in 2008, these fire sales created adverse feedback loops of mark - to - market losses, margin calls, and further liquidations. the unwinding of the risk illusion – that is, the assumption that lending to shadow banks was essentially risk - free – helped transform a dramatic correction in real estate valuations into a crisis that engulfed the entire economy. but for a few idiosyncratic instances since the introduction of deposit insurance in 1933, bank runs have been rendered a thing of the past. deposits below the amount of the federal insurance cap are fully and explicitly guaranteed. access to the federal reserve's discount window for depository institutions complements the deposit insurance system by helping to relieve liquidity pressures in solvent banks. in practice, failing banks usually merge into healthier ones, so that depositors do not lose access to their funds and deposits exceeding the amount of the federal insurance cap are effectively protected. in the relatively few instances of depositor payouts, the fdic has reimbursed depositors expeditiously. of course, the explicit and de facto extension of federal guarantees created moral hazard problems, which the safety - and - soundness regulation of insured depository institutions was strengthened to address. the similarities between deposit runs and short - term wholesale funding runs have suggested to some that the policy responses should also be similar. those taking this position argue for providing discount window access to broker - dealers, guaranteeing certain kinds of wholesale funding, or both. others, myself included, are wary of any such extension of the government safety net and would prefer a regulatory approach that requires market actors using or extending short - term wholesale funding to internalize the social costs of those forms of funding. unlike deposit insurance, the savings of most u. s. households are generally not directly at risk in short - term wholesale funding arrangements. and, also unlike insured deposits, there is an argument in the short - term wholesale funding context that counterparties should be capable of providing some market discipline in at least some of the contexts in which such funding is provided. in thinking about how to regulate shadow banking, we must be mindful that it is not really a single system. it is immeasurably more complicated than the bank deposit system of either the 1930s or today. even with the reduction in activity following the crisis, the scale of shadow banking activity remains

financial system for the early twenty - first century. as i will describe in a few moments, the federal reserve has taken some steps toward this end over the past few years. however, as i will also contend, completion of this task will require a more comprehensive set of measures, at least some of which must cover financial actors not subject to prudential regulatory oversight. before turning to these points, i want to develop briefly the comparison between deposit runs of the pre - fdic period and contemporary short - term wholesale funding runs in order better to explain the nature of the regulatory challenge. vulnerabilities created by short - term wholesale funding there are notable similarities between the bank runs that periodically afflicted the u. s. banking system before the creation of federal deposit insurance and the dramatic short - term wholesale funding runs that began in 2007. each had a cascading, self - reinforcing quality, fueled by questions concerning the solvency of borrowing entities – whether deposit - taking see zoltan pozsar, tobias adrian, adam ashcraft, and hayley boesky ( 2010 ), “ shadow banking ( pdf ), ” staff report no. 458 ( new york : federal reserve bank of new york, july ). bis central bankers ’ speeches banks or dealers seeking credit in repo markets. and, in each case, the opaqueness of the balance sheets of the borrowing entities led lenders to fear that an institution holding assets similar to, or interconnected through counterparty relationships with, another, troubled institution might itself be in trouble. significantly, though, in each case, at least some of the lending actors were interested not just in eventually recovering the full amount of the funds they had extended, but in having access to those funds more or less immediately. some depositors in 1932 needed their money in order to meet the requirements of daily life, while many repo counterparties in 2008 needed their money to meet other short - term obligations. thus the issue was not just a matter of solvency – whether the firm would ultimately be able to pay all the claims even after the run – but also a matter of the short - term liquidity of the bank or broker. the dynamic unleashed by short - term wholesale funding runs in 2007 and 2008 directly exacerbated financial stress. many assets funded through the shadow banking system were traded assets, which could be liquidated rapidly, though often at distressed prices, to reduce the funding needs of the borrowing firms. the