Shadow Bank System Reached $67 Trillion Worldwide

[ukipa]

Shadow Bank System Reached $67 Trillion Worldwide in 2011: Report
The growth in hedge funds, private equity firms and other entities outside the regular banking system is leading one global group to call for stricter oversight of non-bank entities.

The so-called shadow banking system grew to $67 trillion worldwide last year, or about half the size of assets held by the banking system, according to a report released Sunday by the Financial Stability Board, an international policy body.

The U.S. has the largest shadow banking system, with assets of $23 trillion, followed by the European Union, with $22 trillion, and Britain, which has assets of $9 trillion.

A rise in shadow banking in both European Union and the U.K. has mirrored a decline in the U.S. share, to 35% in 2011 from 44% in 2005.

According to the report, banks and shadow banks have tight ties, with banks providing guarantees and credit that lower the cost of transactions and provide liquidity for non-bank firms. Developments in the shadow banking system can affect banks, and vice versa, significantly, the report found.

"The FSB is of the view that the authorities' approach to shadow banking has to be a targeted one," the group wrote in its recommendations. "The objective is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability emerging outside the regular banking system while not inhibiting sustainable non-bank financing models that do not pose such risks."

According to the board, oversight in five areas can lessen systemic risks posed by shadow banking: lessening the spillover effect between the regular banking system and the shadow banking system, reducing the susceptibility of money market funds to runs, easing systemic risks posed by other shadow banking entities, and addressing incentives associated with both securitization and secured financing contracts that may worsen strains during financial panics.

Though the relative size, composition and growth of shadow banks vary considerably worldwide, the size of the shadow banking system remains large relative to the regular banking system in the U.S., the report found.

Investment funds make up the largest slice of the shadow banking system , with $19 trillion of assets, followed by structured finance vehicles, which hold about $5 trillion of assets.

Broker-dealers, finance companies, financial holding companies and money market funds each hold around $4 trillion of assets.

Overall the report measured shadow banking in 25 jurisdictions and the European Union, and across entities that make up roughly 90% of the global financial system.

Original Article Can Be Read Here:
www.americanbanker.com/issues/177_223/shadow-bank-system-reached-67-trillion-worldwide-2011-1054459-1.html?goback=%2Egde_3893426_member_192740675

[Sapphire Capital]

This may be an interesting read

Attachments:

[ukipa]

Excellent reading material. Thank you RL !

[Noor]

Does anybody know if there are big banks out there who, hmm, for lack of better words, play double game and do engage in shadow banking, too, hmm, maybe under different names so as to compensate for what they lose in the open? Just daring to question

[Noor]

Hm, no answer, yet. Lest someone thinks it was a silly question, let me elaborate on it. I was referring in particular to APF's successful career in the past and how one of the southern EU countries economics journalist from a renowed financial newspaper defined him: "An anomaly of our banking system..."

So, that is how a well known CROOK has been defined - as a simple "ANOMALY". Reality is of course quite different, since there are many such anomalies around! Considering the 'Ndrangheta's revenue is at the FIRST PLACE in that southern country and considering APF is part and parcel of it, one should maybe go as far as stating that the 'Ndrangheta is "simply an anomaly of the GDP of that country!"

I should add that such anomalies are not just contributing to the financial well-being of some southern countries but also some northern ones - not to mention those in between. Here, is a recent interesting article on such anomalies:

'Unstoppable' spread of Calabria's 'ndrangheta mafia sees outposts established in UK and Ireland
by Michael Day Author

www.independent.co.uk/news/uk/crime/unstoppable-spread-of-calabrias-ndrangheta-mafia-sees-outposts-established-in-uk-and-ireland-7876558.html

The seemingly unstoppable spread of Italy's most powerful organized crime group has now seen it establish outposts in the UK and Ireland, according to anti-mafia judges. Fueled by its control of a €27 billion-a year-cocaine business, the 'ndrangheta mafia, with its roots in the southern Italian region of Calabria, has begun to colonize London and Dublin, warn the Reggio Calabria magistrates in key reports. The documents, including the 'Crimine' and 'Crimine 2' probes into 'ndrangheta activity, reveal the astonishing extent to which the crime cartel has established itself around Europe. In London, the Aracri and Fazzari clans are thought to be active in the money laundering, catering and drug trafficking.

The level of the activity in the UK and Ireland is low relative to continental Europe. But given the group's ruthlessness and ambition, few experts doubt that its presence in the British Isles will increase as it has in other European countries. Earlier this year, authorities in the south of France warned that the notoriously violent group, which sprang to public attention following the internecine murders of six members outside a pizza restaurant in Duisberg, Germany, 2007, was colonizing France's Cote d'Azur, with bases in Marseilles, Monte Carlo, Nice and Menton. 'Ndrangheta activity in Barcelona has also risen significantly. "They control territory with extortion and intimidation as they do in Calabria or the urban outskirts of Milan, demanding protection money - and not only from Italian ex-pats," said Michele Prestipino, an anti-mafia prosecutor from Reggio Calabria.

"'Ndrangheta is everywhere," the super-grass Luigi Bonaventura, said yesterday in a video interview with La Repubblica. "You only need two to three people to form a cell." Once the number of local mobsters reaches 50, the cell becomes a "locale". "In Germany they have dozens of locali," Bonaventura said.

"In Holland and Belgium they control the ports, in the Cote d'Azur they control the hotels, in Bulgaria investments in the tourist sector on the Black Sea, in the Balkans they control the drug routes." Other informants have revealed how the crime syndicate is skilled at forming alliances with existing criminal groups before going on to exploit them. This cunning has been credited in a recent report by the Dutch police warning that over twenty senior 'ndrangheta figures and hundreds of their associates are now successfully trading in arms and drugs with authorities virtually unaware of their existence. The lack of special anti-mafia laws outside of Italy make the rest of Europe fertile ground for 'ndrangheta clans.

In Italy, convicted mobsters face long stretches in solitary confinement. And members can be jailed under the catch-all crime of "mafia association". This is not the case outside Italy. Some observers have even noted how Germany, the biggest 'Ndrangheta stronghold outside Italy, has assumed its increasingly familiar role of subsidizing the activity of more workshy southern Europeans. The wives of jailed 'Ndrangheta mobsters in Germany get state unemployment benefits of €365 a month. "And they don't even have to pay their rent. How is that possible?" said Vito Giudice Pietro, a local union representative in the German town of Singen, which saw a huge influx of southern Italians in the late 1950s. According to Magistrate Prestipino, the lack of anti-mafia laws "is the biggest obstacle". "In Europe, the institutions have trouble understanding the dangers of organized crime clans and their ability to intimidate," he told La Repubblica.

Note: So let me formulate my question again: How much does Shadow Banking contribute to the financial success of such EU anomalies?

[ukipa]

Dec 6, 2012 21:40:01 GMT 4 @Noor said:

Does anybody know if there are big banks out there who, hmm, for lack of better words, play double game and do engage in shadow banking, too, hmm, maybe under different names so as to compensate for what they lose in the open? Just daring to question

The answer is: Yes.

Banks will establish "shadow" divisions to handle this type of transactions. I am sure others may wish to release the name of some shadow divisions.

[Noor]

Thanks Ukipa.

[Noor]

Note: This is one example from March this year. Not quite sure what to think of the White Knights, though, seems there seem to have been quite a few scandals among Nesara supporters, too...

MF global white knight blows the lid off of the JP Morgan shadow banking mafia
www.realistnews.net/Thread-blowing-the-lid-off-jpm-shadow-banking-mafia

MF global white knight blows the lid off of the JP Morgan shadow banking mafia.

US regulators are holding roundtable talks today about how to protect customer's money. To keep it from basically being stolen. This is in the aftermath of the MF Global collapse of course. We'll speak to a lawyer by the name of James Koutoulas who represents 8000 MF Global customers in the bankruptcy. He says new US regulations won't stop firms from going the way of MF Global so long as they can go to the UK to take on virtually unlimited leverage. He tells us how MF Global was getting around the US leverage limits this way, similar to AIG in 2008, and why it's going on unchanged. We will talk as well about re-hypothecation, and how "churning" allows brokerage firms to leverage up like banks.

And, Federal Reserve Chairman Ben Bernanke gave his economic check up to lawmakers today which meant a reacquaintance with republican presidential hopeful and federal reserve executioner hopeful, Ron Paul. He asked the Fed Chairman if he does his own shopping, among other things, and that if he did, he would know that there is inflation. Well, one thing we have inside knowledge of here at capital account is that, in fact, ben bernanke does do his own shopping as our colleague Alyona can vouch for since she saw him at Whole Foods!

Meanwhile, Bank of America finds yet another way to cash in on the taxpayers and JP Morgan's CEO Jamie Dimon finds yet another way to cash in on attention as a drama queen sounding schizophrenic on regulation while lashing out at the US – specifically the media! He says that we "don't even make any money," while at the same time gloating about the profits made by JP Morgan. He seems to constantly cry whenever things don't go his way and then gloat when he thinks things will be ok. He's like a giant crybaby, drama queen spoiled brat!

[Noor]

Say what you think!

1) Are shadow banking and black markets to be justified when the alternative global system doesn't work?

2) How big have now shadow banking and black market become? Are they still a valid alternative?

3) If mafia orgs make use of them, does that increase your chances of doing business with illegal organizations?

The Secrets of ‘System D’: As Global Economy Falls, Black Market Rises
Posted on January 9, 2012 at 8:22pm by Becket Adams
www.theblaze.com/stories/as-global-economy-falls-black-market-rises/

Perhaps one of the most overlooked consequences of the global financial crisis is the explosion of growth economists have seen in the black markets. Everyone knows about the underhand sale of goods, but few understand just how much covert street vendors and back alley dealers affect the world economy. The rule is this: wherever there are strict – and usually unreasonable — government controls, there will be black markets. People will get around those controls. And although most people tend to view these market “agreements” as a “negative,” because they involve disobeying civil laws, some noted economists see the black market as a morally neutral (or even “positive”) market force.

“Well, the black market was a way of getting around government controls. It was a way of enabling the free market to work,” said famed economist Milton Friedman. “It was a way of opening up, enabling people. You want to trade with me, and the law won’t let you. But that trade will be mutually beneficial to both of us.”
Friedman explains:

The most important single central fact about a free market is that no exchange takes place unless both parties benefit. The big difference between government coercion and private markets is that government can use coercion to make an exchange in which A benefits and B loses. But in the market, if A and B come to a voluntary agreement, it’s because both of them are better off. And that’s what the black market does, is to get around these artificial government restrictions. Now, obviously you’d like a world in which you obey the law. The fact that the black market involves breaking the law is something against it. It’s an undesirable feature. But this only exists when there are bad laws. And nobody, nobody believes that obeying every law is an ultimate moral principle. There comes a point, if you look back at the history of law obedience — think of conscientious objection during wars — I think you will see that everybody agrees that there is a point at which there is a higher law than the legislative law. Therefore, with Friedman’s understanding of black markets, and considering the rapid expansion of government controls compounded with the global economic crisis — is it any wonder that these illicit markets have swollen to such enormous sizes?

Wait a minute — just how big have the black markets become?
Small, illegal, off-the-books businesses collectively account for trillions of dollars in commerce and employ fully half the world’s workers, says Robert Neuwirth, author of “Stealth of Nations: The Global Rise of the Informal Economy,” according to a recent Wired report. And more than just being generators of cash, Neuwirth claims these enterprises are “critical sources of entrepreneurialism, innovation, and self-reliance.” As these illicit markets have grown during the recession, they’ve added jobs, increased sales, and (believe it or not) improved the lives of hundreds of millions, Neuwirth’s book claims.

Shadow Markets of the World

“If all the world’s informal markets were formed into a single independent nation, its $10 trillion economy would be the second-largest on the planet (behind only the US),” writes Robert Capps of Wired. “These markets thrive in places where taxes are low, poverty is high, and resources are scarce. The colors on this map indicate the size of each country’s underground economy, as a percentage of its GDP. As the Global Economy Falls, the Black Market Rises. As the Global Economy Falls, the Black Market Rises Source: Friedrich Schneider et al., “New Estimates for the Shadow Economies All Over the World,” International Economic Journal, 2010 (image courtesy: Wired) “It’s time,” Neuwirth says, “for the developed world to wake up to what those who are working in the shadows of globalization have to offer.” Wired had a chance to sit down with Neuwirth and ask him about black market growth and its overall impact on the world economy. Below is an excerpt from that exchange: Wired: You refer to the untaxed, unlicensed, and unregulated economies of the world as System D. What does that mean?

Robert Neuwirth: There’s a French word for someone who’s self-reliant or ingenious: débrouillard…I decided to use this term myself—shortening it to System D—because it’s a less pejorative way of referring to what has traditionally been called the informal economy or black market or even underground economy. I’m basically using the term to refer to all the economic activity that flies under the radar of government. So, unregistered, unregulated, untaxed, but not outright criminal—I don’t include gun-running, drugs, human trafficking, or things like that. “There are the guys who sneak stuff out of the port. The guys who get it across the border. The truck loaders and unloaders. All working under the table.

Wired: Certainly the people who make their living from illegal street stalls don’t see themselves as criminals.
Neuwirth: Not at all. They see themselves as supporting their family, hiring people, and putting their relatives through school—all without any help from the government or aid networks.
Wired: The sheer scale of System D is mind-blowing.
Neuwirth: Yeah. If you think of System D as having a collective GDP, it would be on the order of $10 trillion a year. That’s a very rough calculation, which is almost certainly on the low side. If System D were a country, it would have the second-largest economy on earth, after the United States.
Wired: And it’s growing?
Neuwirth: Absolutely. In most developing countries, it’s the only part of the economy that is growing. It has been growing every year for the past two decades while the legal economy has kind of stagnated.
Wired: Why?
Neuwirth: Because it’s based purely on unfettered entrepreneurialism. Law-abiding companies in the developing world often have to work through all sorts of red tape and corruption. The System D enterprises avoid all that. It’s also an economy based on providing things that the mass of people can afford—not on high prices and large profit margins. It grows simply because people have to keep consuming—they have to keep eating, they have to keep clothing themselves. And that’s unaffected by global downturns and upturns.
Wired: Why should we care?
Neuwirth: Half the workers of the world are part of System D. By 2020, that will be up to two-thirds. So, we’re talking about the majority of the people on the planet. In simple pragmatic terms, we’ve got to care about that.
Wired: You talk a lot about wares that are sold through tiny kiosks, street stalls, and little informal markets. Where do those goods come from?
Neuwirth: The biggest flow of goods is from China. It’s no secret that China is the manufacturing engine of the planet. In a lot of ways, they’re more capitalist than we are. If someone wants something made—even if that person isn’t licensed—a Chinese factory will make it. It’s also easy to deal with China. You can go to the local Chinese consulate and get a tourist visa within a couple of hours. You can’t say the same about coming to the US. So African importers, for instance, travel to China and commission Chinese firms to make goods for them to sell in Africa.
Wired: But it’s not all Chinese manufacturers, right? In your book, you write about how huge international corporations want to get their goods into informal markets.
Neuwirth: Sure. Procter & Gamble, Unilever, Colgate-Palmolive: They sell lots of products through the little unregistered and unlicensed stores in the developing world. And they want their products in those stores, because that’s where the customers are.
Wired: How does that work?
Neuwirth: Basically, they hire a middleman. Procter & Gamble, for instance, realized that although Walmart is its single largest customer, System D outposts, when you total them up, actually account for more business. So Procter & Gamble decided to get its products into those stores. In each country, P&G hires a local distributor—sometimes several layers of local distributors—to get the product from a legal, formal, tax-paying company to a company willing to deal with unlicensed vendors who don’t pay taxes. That’s how Procter & Gamble gets Downy fabric softener, Tide laundry detergent, and all manner of other goods into the squatter communities of the developing world. Today, in aggregate, these markets make up the largest percentage of the company’s sales worldwide.
Wired: You write that there are even street-vendor-specific brands.
Neuwirth: Absolutely. A good example is UAC Foods, which is based in Nigeria but active throughout West Africa and traded on the Nigerian Stock Exchange. It’s a highly formal company that was originally incorporated by the British more than 100 years ago. UAC Foods owns hotels and restaurants, but it also has this product called the Gala sausage roll. You never find Gala being sold in normal stores. It’s sold only by unlicensed roadside hawkers and at roadside kiosks. Basically, UAC recognized that this product wasn’t going to sell well in a normal store. But sausage rolls are in demand where people are on the go, when they need a quick snack on the side of the highway or in a traffic jam. So UAC relies on this
informal phalanx of thousands of unregulated hawkers who sell Gala sausage rolls all over the streets of African cities. This is UAC’s distribution channel for this one product.
Shadow Markets of the World
If all the world’s informal markets were formed into a single independent nation, its $10 trillion economy would be the second-largest on the planet (behind only the US). These markets thrive in places where taxes are low, poverty is high, and resources are scarce. The colors on this map indicate the size of each country’s underground economy, as a percentage of its GDP.
Wired: Some of the biggest street-market businesses are based around mobile phones. How does this work?
Neuwirth: Most of the world outside of Europe and the United States doesn’t have the option of a monthly mobile phone plan. The companies just sell airtime in the form of rechargeable cards, and customers pay as they go. And the best way to have these cards available everywhere, at any time, is to seed them among the unlicensed street vendors and roadside kiosks. In fact, to advertise their services, mobile companies produce these colorful umbrellas adorned with their company logo, which they give to street vendors. In Lagos, street markets are sometimes called umbrella markets, because there are so many of these umbrellas.
Wired: And this is pretty lucrative for them?
Neuwirth: Oh yeah. When the cell company MTN launched in Nigeria in 2001, it thought that it would replicate the mobile phone market of Great Britain or the US. It didn’t do very well with that. So it retooled and came back with this System D-oriented approach, and now it has more than 40 percent of the market. Its profits are around $2.4 billion in Nigeria alone. So you’re talking about a truckload of money being generated by a totally informal sales force. “Formal companies are wedded to a business plan. but underground companies CAN turn on a dime if conditions change.”
Wired: But, of course, many products in these markets aren’t so legit. There are a lot of knockoffs and counterfeit items—clothing, handbags, electronics. The Chinese even have a word for these goods: shanzhai.
Neuwirth: Literally translated, shanzhai refers to the mountain hideouts of bandits in the Middle Ages. But it has come to mean cloned or knockoff-branded goods. Usually these knockoffs switch a letter in the brand name. I’ve seen phones that say Motolola instead of Motorola. I’ve seen Hogu Boss or Guuucci spelled with three U‘s. In some ways, it’s not even a real attempt to deceive; everyone knows that Gucci is not spelled with three U‘s. Often they’re actually great products. The highest-end knockoff Puma soccer jerseys or sneakers are indistinguishable from the genuine items. And indeed, word on the street is that the same factories that subcontract with Puma and Adidas and other companies are sometimes the ones making the knockoffs.
Wired: But how do people get those illegal goods from China to the underground markets?
Neuwirth: They massage the manifest for the shipping containers. Or send them to ports where there’s less supervision and reduced customs fees. Sneaking things into a country is itself a huge source of System D employment. There are the guys who sneak stuff out of the port. Then there are the guys who get it across the border. And there are the truck drivers and the loaders and unloaders. It’s a fantastic number of people—all of them working under the table.
Wired: You also say that System D is a source of innovation.
Neuwirth: That’s true. Chinese phones were the first to offer dual-SIM-card capability, for example. It was a reaction to a need that wasn’t being met by the formal market. In many countries of the developing world, different mobile companies have the best service in different regions. So, if you’re in the big city but your mom is out in the country and your brother is in another city, you might need separate services to talk to both of them. With a dual-card phone, you can keep two SIM cards in your handset and switch services as easily as you answer call-waiting. There’s a big market for that, and the System D entrepreneurs figured this out long before the legit world did. Nokia makes one now, but the underground Chinese manufacturers had them back in 2007.
Wired: So System D companies can move faster than more formal businesses.
Neuwirth: System D merchants are the ones figuring out what people need. As I said, it’s these merchants who go to China and place the orders. Chinese manufacturers didn’t figure out that a dual-SIM-card phone would be a really good thing. Some folks from Africa and elsewhere said, “Hey, this would be a popular product. We want it.” And the Chinese were happy to make it.
Wired: Merchants drive the innovation?
Neuwirth: Yes. I’ll give you another example. In many places in Africa, there’s no municipal water system. You have to buy drinking water. In West Africa, System D came up with something called Pure Water, which is water in a baggie that’s filled and sealed by a special machine. You get half a liter of water for a minimal price on the street. This has become the way that people throughout West Africa get their drinking water. System D entrepreneurs produce it, and System D hawkers sell it. Together they’ve created a new kind of product that serves a vital need, and they make money doing it. The government in Nigeria even figured out a way to work with the unlicensed Pure Water companies to monitor the purity of their water without forcing them to get registered or regulated or to pay taxes. Every baggie now has a stamp showing it’s been approved by the Nigerian equivalent of the US Food and Drug Administration.
Wired: Why aren’t established companies taking advantage of these opportunities?
Neuwirth: Formal companies are wedded to a business plan. It’s much easier for System D companies to turn on a dime. If conditions change—if Nigeria develops a water system, say—yeah, Pure Water makers will suffer for some short time, but then they’ll figure out the next thing to do. They’re just much more nimble.
Wired: Are there things that the US should be doing to take better advantage of the realities of System D in the developing world?
Neuwirth: Absolutely. For starters, if we really want to engage in true, ground-level economic development in these countries, then we have to begin looking at these markets. These are the places where the bulk of people are being employed. And we have to listen for these markets to tell us what’s needed in a community. It’s not a bureaucrat in Washington or Nigeria who can best establish what’s needed to help the poor in Lagos. It’s the people who are working in these markets and living on the streets who can tell us that. And maybe more US companies can begin acting like Chinese firms, recognizing that there’s a market there and a niche to be filled. In the future, it’s going to be a very lucrative and important niche indeed.
Robert Capps ([e-mail]) is Wired‘s articles editor.

[Noor]

Related to the above:

Where the Mob Keeps Its Money
Alfredo Estrella/Agence France-Presse — Getty Images
www.nytimes.com/2012/08/26/opinion/sunday/where-the-mob-keeps-its-money.html?pagewanted=all

A man hung fake notes during a protest in front of an HSBC branch in Mexico City last month.
By ROBERTO SAVIANO
Published: August 25, 2012

Rome - THE global financial crisis has been a blessing for organized crime. A series of recent scandals have exposed the connection between some of the biggest global banks and the seamy underworld of mobsters, smugglers, drug traffickers and arms dealers. American banks have profited from money laundering by Latin American drug cartels, while the European debt crisis has strengthened the grip of the loan sharks and speculators who control the vast underground economies in countries like Spain and Greece.

Mutually beneficial relationships between bankers and gangsters aren’t new, but what’s remarkable is their reach at the highest levels of global finance. In 2010, Wachovia admitted that it had essentially helped finance the murderous drug war in Mexico by failing to identify and stop illicit transactions. The bank, which was acquired by Wells Fargo during the financial crisis, agreed to pay $160 million in fines and penalties for tolerating the laundering, which occurred between 2004 and 2007.

Last month, Senate investigators found that HSBC had for a decade improperly facilitated transactions by Mexican drug traffickers, Saudi financiers with ties to Al Qaeda and Iranian bankers trying to circumvent United States sanctions. The bank set aside $700 million to cover fines, settlements and other expenses related to the inquiry, and its chief of compliance resigned.

ABN Amro, Barclays, Credit Suisse, Lloyds and ING have reached expensive settlements with regulators after admitting to executing the transactions of clients in disreputable countries like Cuba, Iran, Libya, Myanmar and Sudan.

Many of the illicit transactions preceded the 2008 crisis, but continuing turmoil in the banking industry created an opening for organized crime groups, enabling them to enrich themselves and grow in strength. In 2009, Antonio Maria Costa, an Italian economist who then led the United Nations Office on Drugs and Crime, told the British newspaper The Observer that “in many instances, the money from drugs was the only liquid investment capital” available to some banks at the height of the crisis. “Interbank loans were funded by money that originated from the drugs trade and other illegal activities,” he said. “There were signs that some banks were rescued that way.” The United Nations estimated that $1.6 trillion was laundered globally in 2009, of which about $580 billion was related to drug trafficking and other forms of organized crime.

A study last year by the Colombian economists Alejandro Gaviria and Daniel Mejía concluded that the vast majority of profits from drug trafficking in Colombia were reaped by criminal syndicates in rich countries and laundered by banks in global financial centers like New York and London. They found that bank secrecy and privacy laws in Western countries often impeded transparency and made it easier for criminals to launder their money.

At a Congressional hearing in February, Jennifer Shasky Calvery, a Justice Department official in charge of monitoring money laundering, said that “banks in the U.S. are used to funnel massive amounts of illicit funds.” The laundering, she explained, typically occurs in three stages. First, illicit funds are directly deposited in banks or deposited after being smuggled out of the United States and then back in. Then comes “layering,” the process of separating criminal profits from their origin. Finally comes “integration,” the use of seemingly legitimate transactions to hide ill-gotten gains. Unfortunately, investigators too often focus on the cultivation, production and trafficking of narcotics while missing the bigger, more sophisticated financial activities of crime rings.

Mob financing via banks has ebbed and flowed over the years. In the late 1970s and early 1980s organized crime, which had previously dealt mainly in cash, started working its way into the banking system. This led authorities in Europe and America to take measures to slow international money laundering, prompting a temporary return to cash.

Then the flow reversed again, partly because of the fall of the Soviet Union and the ensuing Russian financial crisis. As early as the mid-1980s, the K.G.B., with help from the Russian mafia, had started hiding Communist Party assets abroad, as the journalist Robert I. Friedman has documented. Perhaps $600 billion had left Russia by the mid-1990s, contributing to the country’s impoverishment. Russian mafia leaders also took advantage of post-Soviet privatization to buy up state property. Then, in 1998, the ruble sharply depreciated, prompting a default on Russia’s public debt.

Although the United States cracked down on terrorist financing after the 9/11 attacks, instability in the financial system, like the Argentine debt default in 2001, continued to give banks an incentive to look the other way. My reporting on the ’Ndrangheta, the powerful criminal syndicate based in Southern Italy, found that much of the money laundering over the last decade simply shifted from America to Europe. The European debt crisis, now three years old, has further emboldened the mob.

IN Greece, as conventional bank lending has gotten tighter, more and more Greeks are relying on usurers. A variety of sources told Reuters last year that the illegal lending business in Greece involved between 5 billion and 10 billion euros each year. The loan-shark business has perhaps quadrupled since 2009 — some of the extortionists charge annualized interest rates starting at 60 percent. In Thessaloniki, the second largest city, the police broke up a criminal ring that was lending money at a weekly interest rate of 5 percent to 15 percent, with punishments for whoever didn’t pay up. According to the Greek Ministry of Finance, much of the illegal loan activity in Greece is connected to gangs from the Balkans and Eastern Europe.

Organized crime also dominates the black market for oil in Greece; perhaps three billion euros (about $3.8 billion) a year of contraband fuel courses through the country. Shipping is Greece’s premier industry, and the price of shipping fuel is set by law at one-third the price of fuel for cars and homes. So traffickers turn shipping fuel into more expensive home and automobile fuel. It is estimated that 20 percent of the gasoline sold in Greece is from the black market. The trafficking not only results in higher prices but also deprives the government of desperately needed revenue.

Greece’s political system is a “parliamentary mafiocracy,” the political expert Panos Kostakos told the energy news agency Oilprice.com earlier this year. “Greece has one of the largest black markets in Europe and the highest corruption levels in Europe,” he said. “There is a sovereign debt that does not mirror the real wealth of the average Greek family. What more evidence do we need to conclude that this is Greek mafia?”

Spain’s crisis, like Greece’s, was prefaced by years of mafia power and money and a lack of effectively enforced rules and regulations. At the moment, Spain is colonized by local criminal groups as well as by Italian, Russian, Colombian and Mexican organizations. Historically, Spain has been a shelter for Italian fugitives, although the situation changed with the enforcement of pan-European arrest warrants. Spanish anti-mafia laws have also improved, but the country continues to offer laundering opportunities, which only increased with the current economic crisis in Europe.

The Spanish real estate boom, which lasted from 1997 to 2007, was a godsend for criminal organizations, which invested dirty money in Iberian construction. Then, when home sales slowed and the building bubble burst, the mafia profited again — by buying up at bargain prices houses that people put on the market or that otherwise would have gone unsold.

In 2006, Spain’s central bank investigated the vast number of 500-euro bills in circulation. Criminal organizations favor these notes because they don’t take up much room; a 45-centimeter safe deposit box can fit up to 10 million euros. In 2010, British currency exchange offices stopped accepting 500-euro bills after discovering that 90 percent of transactions involving them were connected to criminal activities. Yet 500-euro bills still account for 70 percent of the value of all bank notes in Spain.

And in Italy, the mafia can still count on 65 billion euros (about $82 billion) in liquid capital every year. Criminal organizations siphon 100 billion euros from the legal economy, a sum equivalent to 7 percent of G.D.P. — money that ends up in the hands of Mafiosi instead of sustaining the government or law-abiding Italians. “We will defeat the mafia by 2013,” Silvio Berlusconi, then the prime minister, declared in 2009. It was one of many unfulfilled promises. Mario Monti, the current prime minister, has stated that Italy’s dire financial situation is above all a consequence of tax evasion. He has said that even more drastic measures are needed to combat the underground economy generated by the mafia, which is destroying the legal economy.

Today’s mafias are global organizations. They operate everywhere, speak multiple languages, form overseas alliances and joint ventures, and make investments just like any other multinational company. You can’t take on multinational giants locally. Every country needs to do its part, for no country is immune. Organized crime must be hit in its economic engine, which all too often remains untouched because liquid capital is harder to trace and because in times of crisis, many, including the world’s major banks, find it too tempting to resist.

Roberto Saviano is a journalist and the author of the book “Gomorrah.” He has lived under police protection since 2006, when he received death threats from organized crime figures in Italy. This essay was translated by Virginia Jewiss from the Italian.

[Noor]

Der Spiegel 11/14/2012
Beyond Regulators' Grasp How Shadow Banks Rule the World
By Martin Hesse and Anne Seith
The Canary Wharf financial district in London

Beyond the banking world, a parallel universe of shadow banks has grown in the form of hedge funds and money market funds. They're outside the reach of conventional financial regulation, prompting authorities to plan introducing new rules to prevent the obscure sector from triggering a new financial crisis. But in doing so they risk drying up an important source of funding to banks and firms.
Info

In the financial world, there is a narrow divide between heaven and hell. Frenchman Loïc Féry realized this when he was 33. He was a rising star in the banking world, managing the trade in complex loan packages for an investment bank. According to his business card, he was the bank's "global head of credit markets." But then one of his employees gambled away about €250 million ($317 million), and suddenly Féry was without a job.

That was in 2007. A number of investment bankers experienced a similarly precipitous fall in the turbulent years of the financial crisis. But, like Féry, many reappeared before long and became more successful than ever, in the world of the so-called shadow banks. These are companies that engage in business similar to that of ordinary banks, but without being subject to the same strict regulation.

Féry launched a hedge fund in London. These notorious investment firms collect money from customers and speculate with a wide range of securities. Today Féry makes the kinds of investments that are too risky for his former colleagues. He lends the money of his customers to companies whose creditworthiness isn't good enough to qualify for loans from ordinary banks, and he also buys especially risky loan packages from lenders. As a result, he is able to achieve double-digit returns in the midst of a crisis.

But the Frenchman, who has become so successful that he was able to buy a first-division football club, FC Lorient, insists that companies like his make "a positive contribution to the real economy," because they manage risks professionally.

Growing Concern About Lack of Regulation

But banks, regulators, politicians and economists are worried about the parallel universe that has developed beyond the major banks. Until the 2007 financial crisis, shadow banks grew at a pace similar to that of ordinary financial institutions. Hedge funds, special-purpose entities and money market funds benefited from the low interest rates offered by central banks. Banks increasingly used outside companies to handle all the deals that were too risky for them, so that they wouldn't appear on their books. In this manner, shadow banks and regular banks collaborated to build a castle in the air made up of loans.

Within a few years, the volume of financial transactions in the world of shadow banks grew from $27 trillion to $60 trillion today. Now regulators finally want to clamp down and set up a regulatory framework that has so far been conspicuous by its absence for this sector.

After the financial crisis of 2008, German Chancellor Angela Merkel, of the center-right Christian Democratic Union (CDU), said that there could be no "blind spots" on the map of financial market regulation. But while more and more laws were passed to control banks, regulation of the shadow banks is only just beginning.

The man who is supposed to bring about the necessary change works in an office tower far away from major financial centers. When Svein Andresen broods over how he can best go about taming the wild masters of money, he sees the Black Forest through his office window. The level-headed Norwegian is the secretary general of the Financial Stability Board (FSB), which is housed at the Bank for International Settlements in Basel, Switzerland, the umbrella organization of the world's central banks.

The FSB is intended to avert a repeat of disasters like the 2008 crisis. "For years, governments and regulatory agencies paid too little attention to financial institutions outside the world of banking," says Andresen. Now he wants to bring order to the chaotic world of shadow banks. But it's a slow process.

Scant Information Poses Dilemma

In a few days, Andresen and his colleagues will present their proposals for new laws which they hope will be enacted worldwide. But then the political discussions will begin anew, and it will take until at least September 2013 before the new rules are in place.

At the moment, very little is known about many of the shadow companies. Precisely because they remained largely unregulated for so long, there is no government agency that could order them to provide information. "It's a classic chicken-and-egg problem," says Andresen. Without regulation there can be no data, and without data there can be no regulation.

Even the question of who should handle data collection in the future has triggered a dispute between politicians and regulators. It isn't easy to bring together opinions from the 20 countries whose governments meet regularly at the G-20 summits of leading industrial and emerging economies. To get the mammoth problem under control, FSB staff members have compiled a "world map of shadow banks," as Andresen calls the puzzle-like project.

Fifty different types of companies have been identified, and the FSB now intends to focus on the roughly 10 most common types. Regulators suspect that these companies alone have assets totalling $20 trillion.

But the more detailed the research is, the more difficult it gets. For instance, Germany's financial regulator BaFin called for the broad documentation and regulation of hedge funds, only to be blocked by Great Britain and the United States -- not surprisingly, given that many of these funds are headquartered in London and New York. Now only hedge funds that engage in real credit transactions will be subject to greater scrutiny in the future, a group that makes up less than a third of the industry.

Hedge fund manager Féry's business would likely be included. The Frenchman vehemently rejects being branded a reckless gambler, and he is not entirely wrong.

Shadow Banks Have Benefits

Unlike other hedge funds, says Féry, he works without outside credit. If money is lost, he explains, "only our reputation as manager and our end investors -- who know the risk we are taking -- are affected."

Even a regulator quietly admits that the most dangerous loan packages, which Féry buys from banks, among others, are in better hands at a hedge fund, because the deposits of bank customers are not being put at risk. "Those are the good sides of the shadow banking system." Féry also believes that small- and mid-sized companies in particular depend on his services because the banking crisis has forced them to "struggle for financing."

Using similar arguments, lobbyists from other areas of finance have already managed to keep their customers largely out of the discussion. For example, the FSB is not treating so-called private equity firms as shadow banks yet. Their classic business consists of borrowing money from banks and taking over companies, and then burdening those companies with the debt.

That doesn't threaten the stability of the entire financial system. However giants like the Blackstone Group, founded by billionaire Stephen Schwarzman, have long since turned into asset management companies, investing in almost anything available on the financial markets.

Paul Schott Stevens, too, would prefer to keep his clientele away from the scrutiny of regulatory authorities. The 59-year-old descendant of a family of butchers from the southwestern state of Baden-Württemberg is the top representative of an industry that is as powerful as it is obscure. He is the president of the Investment Company Institute (ICI), which represents money market funds.

The funds collect money from conservative investors, including pension funds, insurance companies and ordinary savers. This money is lent for very short periods -- weeks or months at the most -- to banks, municipalities or companies. The lending takes the form of purchases of short-term bonds.

Most money market funds, which control almost $5 trillion in investment capital, are headquartered in the United States. In 2008, they put the fear of God into regulators and politicians when one of the companies, the $62 billion Primary Reserve Fund, bought up large quantities of short-term debt securities from Lehman Brothers. After the investment bank went bankrupt, the fund had to be liquidated.

The Illusion of Security

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.

When it became clear that security is an illusion, the one thing happened that regulators in the financial world fear most: Investors went into a panic and emptied their accounts. The government was forced to issue a guarantee for the money market funds. If it hadn't done so, it is quite possible that the next worldwide financial quake would have been triggered. This is because the industry is a major financier of banks, including European banks.

US money market funds sent the financial world into turmoil once again in 2011, when they withdrew billions of euros from French banks that had become the subject of market speculation in the euro crisis. This time it was the international central banks that came to the rescue, providing the banks with a fresh injection of dollars. French banks, in particular, were dependent on the steady flow of short-term capital from the money market funds. In many cases, the banks would turn around and relend the money for long-term purposes, such as aircraft leases.

Regulator Andresen wants to put a stop to such events. "If the money market funds run into problems, they immediately transfer the risks to the banks -- and vice-versa," he says.

There are plenty of proposals for stricter controls. Since 2010, the US money market funds have at least had to disclose more details about where they invest. They are also required to have more cash reserves on hand in case large numbers of customers suddenly want to withdraw their deposits. Andresen would also like to install thicker security buffers or water down the value guarantee that money market funds give their investors.

Money Market Funds Are Needed

The crazy thing is that Andresen's efforts could bring about precisely the opposite of what he wants to achieve. Because of low interest rates on the bond markets in which money market funds invest, profit margins are already extremely slim. "The business isn't profitable at the moment," industry representative Stevens says emphatically. Stricter rules would cost even more money, and Stevens predicts that many fund managers would quit the business for good.

That too is a nightmare scenario because it would mean that not only many banks, but also companies and even a number of US municipalities would lose an important source of funding. Money market funds buy two thirds of the short-term debt securities issued by American municipalities. Companies that need fresh money to run their daily operations also regularly resort to the shadow lenders of the financial industry.

"The world would be a very, very dark place without money market funds," says Alice Joe of the US Chamber of Commerce. That's because many companies need millions from one day to the next, she explains. All it takes is a call in the morning to the right dealer, "and they'll have the money in their account that afternoon." The same process would take three days with banks.

Even giants like the EADS Group often rely on short-term funds because aircraft production is expensive. If something goes wrong in the production chain, the group's financial managers need to come up with giant short-term loans within hours. When EADS issued €300 million in new bonds a few weeks ago, "they were placed within 15 minutes," says Jörg Weber, who handles the group's dealings with money market funds. It cannot be in the interest of regulators to see such an important industry fall apart, says US lobbyist Stevens.

It's because of concerns like this that the realm of the shadow banks will likely continue to grow. The stricter the regulations for normal banks, the more money migrates to the unregulated parts of the financial world. FSB Secretary General Andresen fears that investors will soon forget the potential consequences of risky deals with shadow banks. "And if regulations aren't in place by then, we could easily experience something similar to what happened in 2008."

Translated from the German by Christopher Sultan

[Sapphire Capital]

shadow banking is a problem only because the Governments of the world give the impression that they want and will and do control financial services and banking to protect the customers and society, whereas they only look for what they feel is politically opportune and leave holes in the supervision system. It has nothing to do with organized crime it has everything to do with a separate market. It always existed, with the volume increase in international banking shadow banking also increased. Shadow banking uses normal banking routes, so if they wanted they could have gotten a handle on it.

[Noor]

Bankster’s Paradise
December 9, 2012
by Frank Jackson
thebilzerianreport.com/banksters-paradise-2/

“Too big to fail”: the verbal gun pressed to the head of American taxpayers as financial collapse loomed in 2008. While publicly claiming not to negotiate with terrorists, the US Government capitulated to banker threats of an imminent financial collapse should they not receive hundreds of billions of dollars of public funds. Congress allowed financial terrorists to ransom the financial integrity of the nation nearly overnight. The banks that fraudulently made fortunes betting on risky investments for short-term gain, forced the American people to shoulder the consequences of their risky behavior. It should be noted that since 2008, there have been NO criminal prosecutions or convictions of bankers. As Matt Taibbi noted:

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world’s wealth — and nobody went to jail.

Without the credible fear of criminal penalty, nothing will ever change in the financial industry. Banks will continue to loot and plunder the citizens of the world though a variety of criminal activities. Bankers are the real mafia; engaging in money laundering, market manipulation, and a host of other crimes.

THE SHADOW BANKING SYSTEM

Most of the banksters’ fraud happens through an off-the-books web known as the shadow banking system. Here, trillions of dollars in exchanges occur without stringent regulatory oversight. The Bank for International Settlements chastised the Federal Reserve for allowing the shadow banking system to grow so large in the run up to the 2008 crisis:

How could such a huge shadow banking system emerge without provoking clear statements of official concern?

But, it’s warning went unnoticed, allowing shadow banking to grow to $67 Trillion in 2011. As Reuters reported:

The system of so-called “shadow banking,” blamed by some for aggravating the global financial crisis, grew to a new high of $67 trillion globally last year, a top regulatory group said, calling for tighter control of the sector.

A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policymakers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and banking activities.

Washington’s Blog recently transcribed an example from Max Keiser on how banks and other corporations use the shadow banking system to cook their books for audits and quarterly reports.

As Max Keiser explains, massive fraud has continuously taken place over many years … as banks shift their liabilities into the shadow banking system during audit time – with the help of accounting firms and the government – and then bring them back onto the books as soon as the auditor leaves:

At the end of the quarter – when they’re supposed to report to regulators their balance sheet, the liabilities and assets that they have – they will temporarily put all of the liabilities … they’ll park them in the shadow banking system.

In other words, they won’t report the liabilities … therefore making their profits look greater than they are.

And then when the regulators move on to the next company, they download the liabilities once again. And they do this on a quarter-by-quarter basis. This is done by all of the Fortune 1,000 companies. They’re engage in massive accounting fraud to cook their books. These 4 remaining big accounting firms are involved day in and day out with massive accounting fraud.

Through the largely unregulated shadow banking system, bankers send false price signals through manipulation of financial reports, thereby making the public and institutional investors believe that the stock market is a more attractive investment than it actually is. The scale of this one complex fraud is massive, but it is only one piece of a very large criminal puzzle.

MONEY LAUNDERING

The banks are also making large profits from supporting known criminal organizations throughout the world. For example, HSBC “[exposed] the U.S. financial system to illegal funds from Saudi Arabian terrorists, Mexican drug cartels and rogue regimes in North Korea and Cuba,” according to the LA Times. Likewise, Wachovia (now Wells Fargo) moved billions of dollars for the Sinaloa cartel in Mexico. As one federal prosecutor explained:

Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations

Ironically, without the cartels, many of the banks would have crashed and burned in 2008. As the Guardian wrote:

At the height of the 2008 banking crisis, Antonio Maria Costa, then head of the United Nations office on drugs and crime, said he had evidence to suggest the proceeds from drugs and crime were “the only liquid investment capital” available to banks on the brink of collapse. “Inter-bank loans were funded by money that originated from the drugs trade,” he said. “There were signs that some banks were rescued that way.”

Just as with any criminal outfit, one can expect repercussions for going public with the bankers’ crimes. Gustl Mollath of German bank Hypo Vereinsbank (HVB) found this out the hard way when he came forward with money laundering allegations against HVB in 2006. Mollath claimed that his wife, an employee of the bank, and others had been funneling money illegally into Switzerland. But, things quickly turned sour for Mollath. According to the Guardian:

Mollath was tried in 2006 after his ex-wife accused him of causing her physical harm. He denied the charges, claiming she was trying to sully his name in the light of the evidence he allegedly had against her. He was admitted to the clinic, where he has remained against his will ever since.

New evidence suggests that Mollath was right all along, and that the charges are likely false. Just like other gangsters, banksters get rid of their accusers.

MARKET MANIPULATION

Given what we’ve covered so far, it would seem pretty naïve to allow the banks to set the most important interest rate in the world: the London Interbank Offered Rate (LIBOR) behind closed doors and without significant oversight. But, that’s exactly what has happened. And not surprisingly, it was recently uncovered that eighteen banks colluded to move the LIBOR in their favor. LIBOR affects $800 trillion in transactions for things like credit cards, mortgages, and the $550 trillion derivative market. Knowing which way it will move ahead of time is extraordinarily powerful information. Ajit Balakrishnan relates an email conversation between two bank members:

The Barclays trader in New York wrote to the Barclays executive in London who made the submissions for Libor: “Hi guys, we have a big position in … Libor … for the next three days … can you please keep [the rate] at 5.39 for the next few days? It would really help….”

The colleague in London answered: “For you, anything … done for you big boy”.

It’s impossible to overstate the significance of having inside information and even the ability to manipulate a rate that has affected nearly one quadrillion dollars in transactions. We have to assume that conversations like the above happened all the time. With banks on the sharp side of these manipulations, the rest of the world is on the losing end.

Not only did the banks benefit from manipulating the LIBOR rate around their trades, they also made their balance sheets look much cleaner and safer than they actually were. They forced the LIBOR rate downward, which increased the prices of floating-debt instruments on the banks’ balance sheets, thereby making the banks appear solvent.

Unfortunately, LIBOR is not the only market that is set by banking insiders. As www.business-standard.com reported :

nvestigations have started to discover other examples of rate-fixing in multiple countries. These enquiries are likely to cover a wide range of indices that have hitherto been believed to be set by “the market”. These indices include ones that set the worldwide prices for natural gas, crude oil, metals, wheat and many, many other commodities, all of which are set by clubs similar to the one that sets Libor.”

Indeed, Barclays already faces $470m fines for manipulating the California energy markets. Of course, this sounds like a big fine, but it’s only a fraction of the profit that Barclay’s made off the trades. Similarly, the fines that the banks are paying for LIBOR manipulation are miniscule as well. Given that no individuals have been charged in the trillion-dollar fraud, the fines are probably being factored in as a minor cost of doing business. There is clearly no incentive for them to stop pillaging the world economy, and probably never will be.

CONCLUSION

The banks are the largest criminal organization in the world. They manipulate markets to the tune of trillions and engage in countless other illegal activities such as money laundering and accounting fraud. Yet, they are free from prosecution. No one has been indicted from their ranks; and, it appears that no one ever will. While the bankers have made out like bandits, taxpayers and laymen have been footed with the bill. And a big bill it is. It is estimated that the money the bankers have stolen has put 100 million people into poverty.

Remember the trillions that they stole, because they stole it from you.

[Noor]

European Central Bank Paper: Shadow Banking in the Euro Area
July 19, 2012 in European Central Bank
publicintelligence.net/ecb-shadow-banking/

The following occasional paper from the European Central Bank was published in April and details the extent of the shadow banking system in the Euro Area. The report was released approximately one month after the European Commission issued a green paper calling for comments on proposed reforms to regulation of the shadow banking system.

SHADOW BANKING IN THE EURO AREA: AN OVERVIEW
38 pages - April 2012

Shadow banking, as one of the main sources of financial stability concerns, is the subject of much international debate. In broad terms, shadow banking refers to activities related to credit intermediation and liquidity and maturity transformation that take place outside the regulated banking system.

This paper presents a first investigation of the size and the structure of shadow banking within the euro area, using the statistical data sources available to the ECB/Eurosystem.

Although overall shadow banking activity in the euro area is smaller than in the United States, it is significant, at least in some euro area countries. This is also broadly true for some of the components of shadow banking, particularly securitisation activity, money market funds and the repo markets.

This paper also addresses the interconnection between the regulated and the non-bank-regulated segments of the financial sector. Over the recent past, this interconnection has increased, likely resulting in a higher risk of contagion across sectors and countries. Euro area banks now rely more on funding from the financial sector than in the past, in particular from other financial intermediaries (OFIs), which cover shadow banking entities, including securitisation vehicles. This source of funding is mainly shortterm and therefore more susceptible to runs and to the drying-up of liquidity. This finding confirms that macro-prudential authorities and supervisors should carefully monitor the growing interlinkages between the regulated banking sector and the shadow banking system. However, an in-depth assessment of the activities of shadow banking and of the interconnection with the regulated banking system would require further improvements in the availability of data and other sources of information.

This paper presents a preliminary investigation of the size and the structure of shadow banking in the euro area, as a contribution to the international and European debate on this issue. In broad terms, shadow banking refers to activities related to credit intermediation, liquidity and maturity transformation that take place outside the regulated banking system. There is widespread international agreement on the need to better understand the activities of shadow banking and the related financial stability risks. Moreover, the forthcoming implementation of Basel III, with the introduction of more stringent capital and liquidity requirements for credit institutions, and the provisions to be applied to insurers may provide further incentives for banks to shift part of their activities outside of the regulated environment and therefore increase shadow banking activities.

Evaluating the size of the shadow banking system in the euro area is not straightforward. A quantitative assessment of the activities of the shadow banking sector can only be based on data sources that unfortunately were not designed specifically for this purpose (i.e. flow-of-funds data and monetary and financial statistics). Moreover, for some activities and markets there are no official data available.

The analysis shows that shadow banking activity in the euro area is smaller than in the United States. In the United States the size of the shadow banking system, measured as the total amount of its assets, was comparable to the size of the banking system in the second quarter of 2011, while in the euro area it represented less than half of the total assets of banking sector. However, the size of assets held by financial intermediaries that are not regulated as banks is still important in the euro area, especially in some countries.

A proxy for the activities of shadow banking in the euro area can be derived from the analysis of the balance sheets of OFIs, a sector which excludes insurance corporations and pension funds but covers most of the agents engaging in shadow banking. Regarding the dynamics of shadow-banking activities, assets of OFIs grew rapidly in the run-up to the crisis, in the period 2005-07. Starting at the end of 2007, OFI intermediation declined sharply in the context of the general deleveraging triggered by the financial crisis.

The paper investigates some key components of shadow banking. In particular, it looks at financial entities other than banks involved in credit intermediation, such as securitisation vehicles, and at the financial intermediaries and markets providing funding to the banks, such as money market funds (MMFs) and the repo market. The data suggests the following.

(i) Securitisation issuance was smaller in volume in the euro area than in the United States before the crisis (around 5% and 12% of GDP respectively) and remains less developed.

(ii) Assets under management by MMFs amounted to €1.83 trillion and €1.1 trillion in the United States and in the euro area respectively by the second quarter of 2011. However, it should be pointed out that in the euro area MMFs are a somewhat heterogeneous group (even if the CESR, i.e. the predecessor of the European Securities and Markets Authority, published in 2010 guidelines on a Common Definition of European Money Market Funds).

(iii) The repo market is a key source of funding in both the United States and the euro area.

The paper also addresses the interconnection between regulated and non-regulated segments of the financial sector undertaking banking activities. Over the recent past this interconnection has been increasing, likely resulting in higher risk of contagion across sectors and countries. Euro area banks rely more than in the past on funding from the financial sector and in particular from the OFI sector, which covers shadow banking entities including securitisation vehicles. This source of funding is mainly short-term and therefore more susceptible to runs and to the drying-up of liquidity. The relative size and relevance of shadow banking intermediation differs significantly across euro area countries.

A more in-depth assessment of the activities of shadow banking and of the interconnection with the regulated banking system would require an improvement in the availability of data and other related information. More than 60% of the assets that are considered part of shadow banking activities in the euro area are linked to financial institutions for which high frequency statistical information is not available. Similarly, very scarce and non-standardised information is available on repo markets. Moreover, the aggregate data collected for the euro area are not detailed enough to allow a full understanding of key elements such as the presence of maturity transformation and leverage and the possible channels for contagion, which are of particular importance when evaluating possible regulatory measures. The paper concludes with some preliminary considerations regarding possible measures to address data gaps and regulatory options.

…

[fireopal]

from my current position in London and my second job in SA I say that this is all overblown, tehre always has been that special purpose unit of banks for special projects. To big to fail is just an excuse, a front. They tried it with Lehman, they were to big to fail and failed anyway, the repercusions are still running through the system but taken down step by step if Lehman can be done so can others. The Trillions paid out were part of the plan, and it was not the banks who took it from the people but the government who pretended that they needed to do so; good con job but so people fall for it at all stages.