Exploding ‘shadow banks’ threaten the global economy

Apartment in Toronto, Ontario province. Canada is a place where people pay very high mortgage interest rates – Photo: BLOOMBERG

According to the newspaper Financial Times, started appearing in the US, the “shadow banks” (Shadow Banking) have gradually spread to the whole world. Recently the “shadow banks” are growing fastest in the regions of Europe and Asia. The proliferation of “shadow banks” is worrying in some countries such as Canada, Australia and New Zealand.

Former Federal Reserve Chairman Ben Bernanke has defined a “shadow bank” as follows: It is a diverse set of institutions and markets that perform various functions. of traditional banking, but outside of the usual banking regulations. “Shadow banks” is a term that includes insurance companies, mortgage companies, pawn shops, and short-term lending institutions.

The “shadow banking” caused a constant flow of money out of central banks, which has caused serial crises for decades.

Not only private institutions specializing in lending, even investment banks and mortgage lenders have pushed money easily into “shadow banks” – less regulated – especially in the lending sector. borrowing businesses.

The core activities of investment banking are regulated and supervised by central banks and other government entities. However, it is a common practice that investment banks conduct many of their transactions in ways that are not shown on a regular balance sheet. As such, these “behind-the-scenes” transactions are not visible on the financial statements for review by regulators.

Globally, “shadow banks” manage about $63 trillion in financial assets, up from $30 trillion a century ago.

Today, China’s “shadow banks” are still among the largest credit operations in the world. This is a huge risk for the Chinese economy, and threatens the country’s growth.

In Europe, hotspots include financial centers such as Ireland and Luxembourg, where the assets of “shadow banks” are concentrated. In recent years, pension funds and insurance companies have expanded with a growth rate of 8-10%/year.

In the US, corporate debt remains near record highs, especially for companies in industries hardest hit by the pandemic, including airlines and restaurants. About a third of publicly traded companies in the US don’t make enough money to pay interest.

An investor told the newspaper Financial Times: “Swirl a stick in Manhattan these days and you’re bound to hit someone involved in the private lending business.”

This suggests that further financial crises are likely to arise in new areas of the market such as shadow banking, where growth is explosive but regulators are yet to come.