2024-07-12 03:28:11
The news is shocking: In the eurozone alone, the so-called “shadow banks” in the third quarter of last year held assets worth 42.9 trillion euros. Against 38 trillion euros held by traditional lenders.
“Although the comparisons between the financial sector and the real economy do not make much sense, it is surprising that the total assets of the shadow banking market are three times larger than the total of the eurozone”, stress to “Naftemporiki” officials of European banking market. For the record, in 2018, non-bank financial intermediaries, as the shadow banking market is officially called, had just 30… billion euros in its hands.
They are called shadow banks because they provide services similar to those of commercial banks, such as facilitating credit and managing savings, but remain outside the scope of banking regulation. “The sector has grown rapidly since the global financial crisis, as non-bank financial institutions have filled the credit gap caused by it,” explains Ariane Curtis, analyst at Capital Economics.
Her analyst Oxford Economics Adam Slater even points out that shadow banking assets have been steadily growing faster than bank assets in recent years, reaching $63 trillion in financial assets worldwide by the end of 2022, representing 78% of global GDP. The assets of this “shadow” group grew at a rate of 8% per year between 2016 and 2021, compared to 5.5% per year for common banks.
The Godfather”
The name “shadow banks” is attributed to economist Paul McCauley, former director of Pacific Investment Management, better known as Pimco. Since then, this name has been regularly used by the press. However, the industry itself considers this moniker to include a certain negative connotation (opacity and mystery) which is not good. For now, however, the use of the acronym NBFI (Non-Banking Financial Institutions) is spreading. NBFIs have been around for decades. However, their expansion across Europe is a more recent phenomenon. These institutions have grown to such a size that they pose a real risk to the financial sector as a whole. “As interest rates have risen over the past two years, the risk of something collapsing in the financial sector has increased, with shadow banking in focus, as it is a sector so exposed to liquidity risk and without direct access to ECB credit lines”, banking market actors emphasize in “N”.
“The continued and significant growth of the shadow banking sector is the biggest threat to the stability of the financial system,” warned Elizabeth McCall, a member of the ECB’s supervisory board, yesterday. McCole has bitter experience of such phenomena after all, as she was working at the New York Fed when the hedge fund Long-Term Capital Management collapsed in 1998, shaking the markets.
“There are certainly warning signs ahead,” McCole said, adding that “it is the area where the ECB has the least oversight and visibility,” which could translate into a “systemic” threat to the stability of the financial system. of the Eurozone.
Shadow banks are outside the banking supervisory and regulatory authority and potential risks could erupt suddenly. Such as the collapse of Bill Huang’s family-owned financial firm Archegos Capital Management in 2021, which led to $10 billion in losses at investment banks including Credit Suisse and Nomura.
Lesson and lesson
“You learn from your lessons at work,” McCole told the Financial Times.
“Some of these funds, especially some hedge funds, are getting so big that they can partially move the market on their own, and they’re not likely to act as shock absorbers in the same way that banks sometimes do,” he said.
McCole is the only American citizen which has sat on the ECB’s supervisory board since it was created a decade ago to oversee the eurozone’s biggest banks.
McCole, who is due to leave the ECB in November, said that shechecks whether the 113 banks of the Eurozone which it supervises, have a complete picture of their exposure to “shadow banks”.
The rise of “shadow banking” began after the 2008 bank collapse, as credit shifted from banks’ balance sheets to other companies that behave like traditional lenders but are subject to lighter regulation.
The Financial Stability Board—an international group of supervisors formed after the 2008 crash—monitors these “non-bank financial intermediaries.”
This expansive sector includes asset managers, pension funds, insurers, hedge funds, private equity funds and real estate investment trusts.
“Shadow banks are an important source of alternative financing in many countries, for example, by offering solutions with fixed obligations,” a report by S&P Global emphasizes. They can also improve the efficiency and depth of a financial system by holding assets with maturity structures and credit characteristics that may not be attractive to traditional banks.
However, the S&P Global report clarifies, “some shadow banks have high leverage, structural liquidity mismatches and strong credit exposure in specific economic sectors, such as real estate financing. This makes some hedge funds particularly vulnerable to a potential loss of investor confidence.