January 27, 2011 / 2:25 PM / 9 years ago

Goldman warns about resurgence of shadow banking

DAVOS (Reuters) - Too much regulation risks driving risky financial transactions and other activities into the more opaque areas of the financial system, Goldman Sachs’ (GS.N) number two executive Gary Cohn warned.

Speaking at the annual World Economic Forum, Cohn identified the move toward the unregulated banking system, also known as shadow banking, as one of the biggest current threats to financial stability three years after the credit crisis.

“You are asking for a new shadow banking system to grow bigger and bigger,” Cohn said. “

“Risk is risk, whether it sits in a regulated entity or not. “My concern is that we are pushing it more and more from a regulated to a less regulated, more opaque sector.”

His comments came after a report by consultancy Oliver Wyman on the stability of the financial system identified the resurgence of shadow banking triggered by a higher regulatory burden for banks as one of the biggest threats to the system.

Cohn also said another problem the industry was facing was the difficulty in keeping up with the array of new rules being imposed on banks.

He also pointed to regulatory arbitrage that would follow an uneven implementation of the new financial rules in various parts of the world.

“There are parts of Basel III that are subject to local rules,” he said. “Markets are very efficient and will find the more efficient location for transactions.”

Last but not least, he said too much regulation could ultimately stifle economic growth as new requirements for banks to hold more and more capital would ultimately drive up the cost of services to clients.

Reporting by Lisa Jucca; editing by Michael Stott

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