Shadow banking is back in the spotlight
The failure of Greensill Capital has reignited calls for further scrutiny of the shadow banking sector, which is made up of entities outside the regulated banking space, including money market funds, hedge funds, brokers. and peer-to-peer lenders.
Launched in 2011, Greensill Capital has provided supply chain finance (SCF), which uses the higher credit rating of a large buyer to provide cheaper financing to its small suppliers, ensuring faster payment. of their goods. In 2019, Greensill reportedly provided $ 143 billion in financing to more than 10 million customers and suppliers in 175 countries. It also securitized these receivables and sold them to institutional investors. So far, everything has been fine, until it files for bankruptcy on March 8, leaving Credit Suisse (and possibly others) exposed to the tune of billions.
“A striking feature of this saga is that Greensill Capital, like the failing payment group Wirecard, owned a regulated German bank when much of its operations fell outside of traditional banking regulation. The ability of the shadow banking system to provoke more dangerous systemic shocks should not be underestimated, ”writes John Plender in the Financial Time.
Shadow banking includes useful – and necessary – intermediation activities, including risk pooling, wealth management and securities lending. But it is this intersection of banks and shadow banks that concerns central banks and regulators the most, mainly because they have limited visibility and oversight over the entire sector.
At the end of 2019, the shadow banking sector represented almost half (49.5%) of the global financial system
At the end of 2019, the shadow banking sector made up almost half (49.5%) of the global financial system, according to the Financial Stability Board (FSB) ‘s latest Global Nonbank Financial Intermediation (NBFI) monitoring report, published in December. 2020. NBFI represents roughly $ 200 billion in assets, growing 8.9% in 2019 and surpassing the 5.1% growth in the banking sector. Many fear that this expansion is a sign of rising systemic risks.
According to the FSB report, the United States accounts for the world’s largest share (30%) of what they call “narrow-measure assets,” which are part of NBFI that “may present financial stability risks of the type. banking ”. But while the United States dominates the world in shadow banking assets, China dominates the rest of the emerging market economies. According to data from the China Banking and Insurance Regulatory Commission (CBIRC), released in December 2020, the size of the shadow banking sector is estimated at Rmb 84.8 billion ($ 13.04 billion), or equivalent to 86% of the gross domestic product and 29% of the country’s total banking assets.
Chinese officials didn’t wait for a Greensill to perform at their doorstep before taking action and had the foresight to release new regulations late last year. In the April cover story, Asia Editor-in-Chief Kimberley Long examines how Chinese financial supervisors are tackling the delicate task of curbing shadow banking without cutting off a key funding source during the recovery phase of Covid-19.
However, as many regulators try to get a better handle on the more established businesses that make up NBFI, another storm could be brewing. What could be of growing future concern is the role shadow banks play in the $ 1.82 billion cryptocurrency market, which is a small portion of the total but is growing rapidly. They are entering a space that banks fear to venture into – lend to investors or companies, such as hedge funds, that speculate in Bitcoin and other crypto assets. This opaque area of the market also deserves close scrutiny.
Joy Macknight is editor-in-chief of The Banker. Follow her on Twitter @joymacknight
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