Shadow Banks Crucial to Destructive Dominant Financials

In 2007-2008 banking crisis, many investment bankers found themselves quickly without jobs. But, many, on the other hand, found themselves before too long with a new position working in the world of “shadow banks.” These banks offer services similar to above board banks, however are not subject to the same regulation of mainstream banks.  Oftentimes, they assist commercial banks in scheming the riskier trades.

Until the onset of the banking crisis, shadow banks grew at a pace that mirrored ordinary banks, but such shadow banks as hedge funds, special-purpose entities and money market funds benefited from the low interest rates offered by central banks.  The financial system evolved so that shadow banks and regular banks eventually merged in transparent secrecy.

Above board banks have begun increasing using shadow banks to handle all risky deals, which allows them to use, essentially, two sets of books.  That is how, according to Spiegel, “shadow banks and regular banks collaborated to build a castle in the air made up of loans.”

By 2012, the volume of shadow financial transactions rose from $27 trillion to $60 trillion in merely three years.  Now, politicians and regulators are ready to reel in the shadow banking industry. While a flurry of regulations have all been introduced to regulate above board, and are expected to undermine smaller banks while large international banks persist,  the regulation of shadow banks is still in its incipience.

Currently, little information is known about the shadow banks.  Politicians and regulators are unsure what agencies would be tasked with collecting data on shadow banks so that they can even begin to be regulated in the first place.

The G20 presents a forum in which such discussions would take place, but still the Bank for International Settlements is expected first to compile a “world map of shadow banks.”
Thus far in the process, fifty different types of companies have been identified as functioning in “shadow” territory, with the institutions having assets totalling $20 trillion. But, governments really cannot tell the size of the under board financials. Germany’s financial regulator, BaFin, is said to have called for broad documentation and regulation of hedge funds, but was blocked the the US and Great Britain. Most hedge funds are located in Britain and the US; namely, London and New York.

While many claim the advantages of having risk put into a hedge fund, such as customer accounts not being used as collateral, they overlook the interconnected nature of the shadow financial system and the financial system itself. What many fail to understand is they are the same network.

There are plenty of loopholes, leaving plenty of parasitical financial institutions above board and un-scrutinized except by the waves of populist anger cropping up in diverse countries all over the globe. For example, regulators are not treating private equity firms as shadow banks. These companies borrow money from banks and take over companies, and then burden the newly acquired company with the debt.

Many of these banks invest as if they are playing a massive game of financial Russian roulette.  They buy essentially anything on the market in a global gambling game.

For all banks, attachment to the shadow banking system means the likelihood of collapse due to off-book pressures.

It came as a shock to customers in the industry because money market funds had long been viewed as a safe investment, precisely because, on the surface, they are often very similar to banks. They even issue credit cards and checkbooks in the United States. The shadow banking industry often acts in unpredictable ways. For instance, money market funds in the US increased global uncertainty when they withdrew billions of euros from French banks. International central banks had to be deployed in a bailout. Banks were given a fresh hit of $$$$$. This greatly came to compromise France.

More government regulation is the only viable option, in the minds of bureaucrats, but if the regulators can’t find the potential violators, not a million-billion laws will fix much.  Not to mention, so long as low interest rates equate a free line of credit for such shadow banks, they can virtually buy themselves immunity.

But, because the under board facet of the dominant financial industry has woven itself crucial to the global economy, shadow banks will continue to grow without a fundamental paradigm shift.

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