IMF says Shadow Banks could endanger Global Financial Stability


I just downloaded and scanned the International Monetary Fund ("IMF") report on Shadow banking.

You know when the IMF talks about shadow banks comprising the global financial stability, that this is a big issue. IMF believes Shadow banking, broadly defined as credit intermediation outside the conventional banking system, constitutes about one-fourth of total financial intermediation worldwide.

I did a brief post on this a few months back which proved to be quite popular. See Size of Shadow Bank Market Grows

What the market lacks is data. I asked the question are we pushing risk where it cannot be seen?

The reason this is considered “shadow” (doesn’t that term really scare people) is that these loans are not regulated in the same way as banks. If we assume risk doesn’t change regardless of owner, is pushing loans to a more unregulated environment a bad thing. Ask the economists.

I mean the banks were regulated. And look at the mess the Financial crisis of 2008 is still wreaking on the credit and capital markets more than 6 years in.

The IMF went on to give reasons for the explosive growth in shadow banking

Although shadow banking takes vastly different forms across and within countries, some of the key drivers behind its growth are common to all: a tightening of banking regulation and ample liquidity conditions, as well as demand from institutional investors, tend to foster nonbanking activities. The current financial environment in advanced economies remains conducive to further growth in shadow banking. Many indications there point to the migration of some activities—such as lending to firms—from traditional banks to the nonbank sector.

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Yes, there is a massive movement to create non bank entities to fund wholesale and consumer credit. We are dealing with many of those platforms that enable the transfer of assets here on Trade Financing Matters and Spend Matters – companies like Tungsten, Basware, Nipendo, PrimeRevenue and Taulia. The trick is understanding the various nuances of how they do it.

And remember, the irony in the shadow bank market is that many banks lend to non banks precisely to invest in alternative assets. In fact, it’s one of the growth stories for banks who solicit factors, hedge funds, etc. for credit lines.

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