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Post by congregatio on Dec 10, 2013 8:39:04 GMT 4
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Post by Omar on Jan 6, 2014 22:45:48 GMT 4
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Post by Guest on Jan 26, 2014 15:06:02 GMT 4
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Post by Guest on Jan 27, 2014 20:40:51 GMT 4
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Post by ukipa on Jan 28, 2014 1:58:14 GMT 4
China's bank regulator steps into WMP ponzi row
The CBRC says principle and non-principle guaranteed wealth management products issued by banks should not fall under shadow-banking. But this doesn't appear to address the risks.
Banks sold Rmb17 trillion in wealth management products last year
China’s banking regulator has said wealth management products (WMPs) issued by banks should not fall under the shadowy private-lending system, moving to calm fears of a giant ponzi scheme.
China Banking Regulatory Commission stated last week that principle-guaranteed products, typically invested in money markets, should be included on bank balance sheets, meaning banks will have to provision accordingly.
While non-principle guaranteed products will continue to be treated as off-balance-sheet items, they too will not be classified under the shadow banking system, or non-bank private lending.
But WMPs developed and issued by financial institutions other than banks, including trust companies and securities firms, will likely remain part of the shadow banking industry.
A source from one large commercial bank stated that the regulation surrounding WMPs is clear and that it fully understands the volume and investment of WMPs launched by banks, and as such these products should not be counted as shadow banking, Reuters reported.
The CBRC declaration comes after an investor protest last week, as reported, amid fears that loosely regulated WMPs could undermine China’s financial system.
Lillian Zhu, senior analyst at Shanghai based consultancy Z-Ben Advisors, agrees that money managed by banks should not fall under shadow banking. However, she points out that this statement does not remove the risks of these products.
In fact, she suggests CBRC's move indicates that it thinks the WMP industry is under control and as such may not be inclined to tighten regulatory controls surrounding issuance.
Last week, investors in Shanghai claimed that WMPs they bought in a branch of Huaxia Bank had failed to deliver promised yield. Huaxia blamed a rogue salesperson for acting without the bank's authorisation.
In a report last week Fitch raised concerns over WMPs, particularly their roll-over nature. "Proceeds raised from products containing credit can be used to repay, roll over, or purchase borrowers’ existing loans……when in fact the loans are not being repaid by borrowers themselves, but rather by investors,” it wrote.
Fitch points fearfully to the opacity of these products, with no centralised data on what has been issued and by whom, or even the make-up of asset pools backing WMPs.
Another risk is that banks might engage in transactions with their own and each other’s WMPs, potentially undermining their balance sheets on a grand scale.
In China WMPs are usually short term, with around half of all new products launched in the first nine months of this year having a duration of one to three months, with a yield ranging from 4-5%, which is higher than bank deposits.
China’s WMP industry is huge and growing fast: as at the third quarter there was an estimated Rmb12 trillion in outstanding WMPs, and it is expected to hit Rmb13 trillion by the end of this year, from Rmb8.5 trillion at the end of 2011, finds Fitch.
Banks are the main issuers of WMPs. Last year they sold an estimated Rmb17 trillion in WMPs, compared with sales volume of around Rmb1 trillion for other financial institutions, notes Zhu of Z-Ben.
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Post by Guest on Jan 30, 2014 2:51:10 GMT 4
China Halts Bank Cash Transfers
The People’s Bank of China Bank of China, the central bank, has just ordered commercial banks to halt cash transfers.
This notice, for instance, appears on the online portal for Citigroup's Citigroup's Citibank unit for its China customers:
Important Notice:
1. Due to the system maintenance of People’s Bank of China, Domestic RMB Fund Transfer through Citibank (China) Online and Citi Mobile will be delayed during January 30th 2014, 16:00pm to February 2nd 2014, 18:30pm. As to the fund availability at the receiving bank, it depends on the processing requirements and turnaround time of the receiving bank. We apologize for any inconvenience caused.
2. During Spring Festival, Foreign Currency Transfer Transaction through Citibank (China) Online and Citi Mobile will be temporally not available from January 30, 2014 18:00pm to February 7, 2014 09:00am. We apologize for any inconvenience caused.
If you have any enquiries, please reach us via our 24-hour banking hotline at 800-830-1880 or credit card hotline at 400-821-1880. If you are calling from other parts of the world, please reach us at 86-20-38801267 for banking services or 86-21-38969500 for credit card services.
In short, there will be a three-day suspension of domestic renminbi transfers. There will also be a suspension, spanning nine calendar days, of conversions of renminbi to foreign currency.
The specific reason given—“system maintenance” at the central bank—is preposterous. It is not credible that during the highest usage period in the year—the weeklong Lunar New Year holiday beginning January 31—the central bank would schedule an upgrade and shut down cash transfers.
A better explanation is that the country’s banking system is running dry. Yes, there is an increased need for money in the run-up to and during the Lunar New Year holiday, but that is only a small factor. After all, central bank officials knew this spike in demand was coming—it occurs every year at this time—and a core function of central banks is to manage seasonal liquidity fluctuations. Moreover, the holiday has not started yet, and the PBOC, as that institution is known, could have added more liquidity to meet cash needs.
So what’s really going on? This crunch follows similar incidents in June and December of last year. In June, for instance, the central bank used the excuse of a “system upgrade” to allow banks to shut down their ATMs and online banking platforms. As a result, they conserved cash and thereby avoided a nationwide meltdown.
So today’s “system maintenance” notice is a sign of a fundamental problem. Banks, in short, need cash to rollover ever-increasing amounts of nonperforming loans and wealth management products. This month, cash needs are even higher than normal because of the impending default of the Credit Equals Gold wealth product scheduled for January 31. Analysts are worried that the failure, if it occurs, will cause a China-wide panic.
Perhaps more important, the Federal Open Market Committee is holding its next meeting on January 28-29 so there could be an announcement on the 29th on the trimming of bond purchases. The suspension of FX transactions means that speculators will not be able to dump renminbi and buy dollars. Fed Chair Bernanke’s words on tapering, beginning in May of last year, shook emerging markets. A FOMC announcement this time could undermine China, especially because of the darkening perceptions about that country.
Pundits, pointing to the nation’s $3.82 trillion in foreign exchange reserves, are fond of saying that Beijing has enough money to weather any situation. Yet China does not have a foreign currency crisis. It has a domestic currency one where dollars, euros, pounds, and yen are not much use.
Banks are evidently scrambling for cash. They have, in the past, resorted to desperate maneuvers at the ends of calendar quarters to meet regulatory requirements. The current crunch is even more alarming because it cannot be occurring for quarter-end reasons.
Something is very wrong in China at the moment. Banks’ apparent need to conserve cash, coming just weeks after the last incident, looks ominous.
Follow me on Twitter @gordongchang
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Post by Guest on Feb 2, 2014 22:56:58 GMT 4
Banking reform China bets on privatization to save village banks Monday, July 29, 2013 www.chinaeconomicreview.com/rural-banks-banking-private-ownership-privatized-SME-BOC-regulationAfter eluding police for 10 days last year, a dragnet in central China’s Henan province finally closed in on Li Mingzhong, the head of a BOC Fullerton Community Bank branch who had absconded with more than US$16 million in rural investor funds. In mid-2012, Li mismanaged millions of yuan in bank deposits by investing in a faulty ceramic tile producer, according to state-run Xinhua News Agency. Among a number of bad practices, the banker lent to friends without collateral and borrowed from shadow banks at usurious interest rates, leading to mounting non-performing loans. Before the bank collapsed, Li ran. Now he could face the death penalty. The case isn't isolated. Stories of outlandishly poor and unqualified management at village and town banks have circulated in Chinese media since 2006, when the government first allowed private capital to enter the sector. On July 5, the State Council, China's cabinet, said it would promote greater private ownership in the country's smallest banks. It also said it would launch a trial that would allow private corporations to set up small banks – a first for a country that still refers to itself as communist. The measure was a bold move for an industry thoroughly dominated by government-backed institutions. Experts said unleashing private capital at the village level could clear out a contagious banking culture spreading from state banks. It also shows the state's willingness to push on with piecemeal but targeted reform. “[The latest reform] is substantial because it's quite detailed on how private capital can get involved,” said Oliver Rui, a professor of finance at China European International Business School (CEIBS) in Shanghai. Some analysts, however, said the reform could get stuck on the low rung that it starts on. Mothership banks The village and town banking sector is already more than 70% privately owned. But that figure can be misleading in understanding how the banks are controlled. Existing state banks must hold the controlling, but not necessarily majority, stake in all small banks. Private shareholders are small corporations and hold non-controlling stakes. The new measures from Beijing would put an end to that required state control – at least on the village level. When the government first let private capital enter villages and towns in 2006, it had grand expansion plans for the banks. The China Banking Regulatory Commission (CBRC) sought to establish more than 1,000 of them within the first three years. But the privatized versions of the country's smallest banks got off to a rough start. Seven years later, the number of active banks is only about 830 with an accumulated total capital of only US$7.4 billion and a loan balance of US$4.3 billion. Industry insiders said the tight connection to the state banks that control them have led to bad practices and a lack of competition. A number of irregularities have been reported at BOC Fullerton Community Bank, the chain of banks where now-detained Li Mingzhong had worked. The village and town bank is a joint venture between Bank of China and a subsidiary of Singapore's sovereign wealth fund Temasek Holding. A report on business news site China Finance Net said the banks had “copied the risk-control system of the mother bank,” Bank of China, leading to a level of financial stress unsustainable for a small financial institution. The bank chain had also reportedly hired loan officers with only two months of training. Bigger state banks have injected many aspects of unfavorable culture into village and town financial institutions, said Ed Wu, a Beijing-based director at PlaNet Finance Group, an international non-profit focused on developing microfinance. Wu advises micro-loan institutions. “By nature, you get people with a traditional banker mentality and relationships on the loan and deposit side,” Wu said. “What you need is more local private capital at the shareholder and board member [level] making the decisions. [People] who know the community, and are willing to differentiate and innovate.” Rui at CEIBS agreed that giving local talent at the banks more command over operations could boost competitiveness. “They're aggressive when it comes to taking risks. In other words, they can provide better service to the SMEs,” he said. “The bank managers and loan officers have a better understanding of the market and the community.” Firm control Getting capital to SMEs is likely the main purpose of the trial, not greater banking sector reform, said Liao Qiang, director of financial institutions ratings at Standard & Poor's in Beijing. As a side effect, it may also boost the profitability of small banks as they go after higher risk, higher return SMEs and must learn to better price in risk without the safety net of state ownership. The move should not be interpreted as a sign that similar deregulation will come to China's financial system as a whole any time soon, Liao said. Competition for capital in China's banking sector is already intense and introducing privatization at mid-sized banks could limit the institutions' capacity to absorb bad loans. Privatized banks on the village and town level should not greatly impede regulators' ability to control the market. “We are talking about very small institutions, so the downside could be well managed,” Liao said. “That's why the regulators are more comfortable to start this scheme in villages and towns.” There’s little hope of the regulations spreading to the higher reaches of the banking industry in the near future. For regulators reticent to give up control of the banking system, allowing wider privatization will likely prove too excruciating. |
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Post by Guest on Feb 3, 2014 16:19:39 GMT 4
Shadow Banking Risks Exposed by Local Debt Audit: China Credit By Bloomberg News Jan 6, 2014 11:05 AM GMT+0100 www.bloomberg.com/news/2014-01-06/shadow-banking-risks-exposed-by-local-debt-audit-china-credit.htmlChina’s audit of local governments exposed an increased reliance on shadow banking, swelling the risk of default on 17.9 trillion yuan ($3 trillion) of debt. Bank lending dropped to 57 percent of direct and contingent liabilities as of June 30 from 79 percent at the end of 2010, while bonds rose to 10 percent from 7 percent, National Audit Office data show. Trust financing surged to 8 percent from zero, while other channels that sidestep loan curbs accounted for the remaining 25 percent. The yield on five-year AA notes, the most common rating for local government financing vehicles, jumped by a record 158 basis points last year to 7.6 percent. That exceeds the 5 percent on emerging-market corporate notes, Bank of America Merrill Lynch indexes show. “As banks tightened their purse strings, local governments had no choice but to resort to shadow banking and incur more expensive borrowing costs,” said Tang Jianwei, a Shanghai-based economist at Bank of Communications Co., the nation’s fifth-largest lender. “That will further constrain their repayment ability and eventually overwhelm some lower-level entities which have borrowed way beyond their means. I won’t rule out some defaults in 2014.” Premier Li Keqiang is cracking down on less-regulated shadow banking activities, estimated by JPMorgan Chase & Co. at $6 trillion in May last year, while the central bank engineered a cash crunch in June 2013 to push deleveraging in the world’s second-largest economy. China’s borrowing spree since 2008 has evoked comparisons to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decades. Credit Negative The increase in government debt as revealed in the audit is a credit-negative development, Moody’s Investors Service said in a report dated Jan. 2. “This sizable accumulation in local government debt will be a burden on the carry risks to central government finances,” it said. Local government debt overdue at the end of June was 1.15 trillion yuan, or 10.56 percent of borrowings, the audit report showed. That compares with the 1.3 percent overdue ratio in the banking system, reflecting the practice of rolling over regional debt instead of classing it as delinquent, according to Barclays Plc. “Rapidly rising local-government debt poses the biggest medium-term fiscal risks,” Chang Jian, a Hong Kong-based economist at Barclays, wrote in a Dec. 31 note. “Intertwined with the under-regulated and poorly managed shadow banking business, slowing economic growth and more liberalized markets, systemic financial risks are increasing.” Loans Capped The China Banking Regulatory Commission estimated in 2010 that about half of the bank loans to LGFVs were being serviced by secondary sources including guarantors because the ventures couldn’t generate sufficient revenue, according to a person with knowledge of data collected by the nation’s regulator. In 2012, the agency suggested banks cap loans to such vehicles to levels reached at the end of 2011. CBRC Chairman Shang Fulin reiterated the limit last month. As a result, growth in bank loans to local governments slowed to 19 percent to 10.1 trillion yuan from the end of 2010 to June 30, 2013, compared with a 67 percent jump in total debt, audit data showed. Trust financing to LGFVs surged to 1.4 trillion yuan from zero and bond issuance more than doubled to 1.8 trillion yuan. Asset Quality As asset quality concerns on loans to LGFVs has been a major valuation overhang for Chinese banks, the outcome from the recent national audit on local government debt is positive for banks, Simon Ho and Paddy Ran, analysts at Citigroup Inc. wrote in a report on Jan. 3. China’s local governments are responsible for 80 percent of spending while getting about 40 percent of tax revenue, the legacy of a 1994 tax-sharing system, according to the World Bank. Local governments have set up more than 10,000 financing vehicles to fund projects such as subways and airports because regulations limit their ability to borrow money directly. Deprived of relatively cheaper loans from banks, some LGFVs are paying more to borrow from trust companies. Local governments are normally charged more than 10 percent annually for funding from such sources, the official Xinhua News Agency reported in November. That compares with the People’s Bank of China’s 6 percent benchmark one-year lending rate. Shanghai Chengtou Corp. sold the first onshore dollar-denominated bond by an LGFV, issuing $200 million of AAA rated notes with a 3.3494 percent coupon on Dec. 27, according to a statement on the website of the Shanghai Clearing House. Trust Companies Trusts typically get people to invest at least 1 million yuan in alternatives to bank accounts linked to the PBOC’s 3 percent benchmark deposit rate. They had 10.1 trillion yuan of assets under management as of Sept. 30, an increase of 60 percent from a year earlier, according to the China Trustee Association. About 26 percent of their proceeds were invested in infrastructure projects. The National Development and Reform Commission will work to prevent default, fiscal and financial risks in LGFVs as 100 billion yuan of debt is estimated to come due this year, according to a statement posted on the agency’s website on Dec. 31. The special vehicles will be allowed to sell bonds at lower costs to refinance higher-cost borrowings, and the NDRC can approve new debt to finish projects short of funding, according to the statement. Default Concern “The top leadership is aware of the problem, and has already started to take action,” said Wang Ming, marketing director at Shanghai Yaozhi Asset Management LLP., which oversees 2 billion yuan of fixed-income investments. “The NDRC statement is meant to address the default concern.” President Xi Jinping last year said the performance of regional officials will be measured by how effectively they control debt. There haven’t been any defaults in China’s publicly traded domestic bond market since the central bank started regulating it in 1997, according to Moody’s Investors Service. The State Council has issued an order imposing new limits on shadow banking, two people familiar with the matter said. The new rules include banning transactions designed to avoid regulations such as moving interbank lending off balance sheets, said the people, who asked not to be identified because the order hasn’t been made public. The regulations were sent to ministries and local governments last month, the people said. The Shanghai Composite Index (SHCOMP) of stocks slid 1.8 percent to 2,045.71 at the close today, its lowest since Aug. 8. The gauge has slumped 3.3 percent in the first three trading days of 2014, the worst start to a year since 2002, as gauges of manufacturing and services industries fell amid higher money-market rates. The securities regulator approved 11 initial public offerings for Shenzhen over the weekend. Surging Yields The yield on China’s 10-year sovereign bond surged about 100 basis points, or 1 percentage point, last year to 4.6 percent. The seven-day repurchase rate jumped to an unprecedented 10.77 percent on June 20, pushing the average rate in 2013 to 4.09 percent, up from 3.50 percent in 2012. The one-year interest-rate swap, the fixed payment needed to receive the repo rate, reached an all-time high of 5.38 percent on Jan. 2, 2014. The yuan, which advanced 2.9 percent in 2013, fell 0.02 percent to 6.0526 per dollar in Shanghai today. Borrowing costs are climbing as regulators are freeing up interest rates. The nation started the trading of negotiable certificate of deposits last month, a sign that regulators will accelerate the liberalizing of rates, after the ruling party’s third plenary session in November decided to grant the market a “decisive” role in allocating resources. “As the top decision makers attempt to free controls on interest rates, they understand a stable market environment is necessary to achieve the goal.” said Shanghai Yaozhi’s Wang. “As these LGFVs get implicit guarantees from the state, and considering the negative impact of any defaults from a government-guaranteed entity on markets, the government will certainly work hard to prevent that.” To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net; Jun Luo in Shanghai at jluo6@bloomberg.net To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Amit Prakash at aprakash1@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net |
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Post by Guest on Feb 5, 2014 22:31:31 GMT 4
What The Shadow Banking System Knows
Politics / Banksters Jun 26, 2013 - 03:40 PM GMT
By: Andrew_McKillop
Politics
GLOBAL REACH
PIMCO's Paul McCulley defines the shadow banking system as follows; “I coined the term “shadow banking system” in August 2007 at the (US) Fed’s annual symposium in Jackson Hole. Unlike conventional regulated banks, unregulated shadow banks fund themselves with uninsured short-term funding, which may or may not be backstopped by liquidity lines from real banks. Since they fly below the radar of traditional bank regulation, these levered-up intermediaries operate in the shadows”, outside the regulated conventional bank system. Paul McCulley summarized shadow banking as: "The whole alphabet soup of levered up non-bank investment conduits, vehicles and structures". These financial intermediaries operating off the radar screen of international financial regulators were therefore “unknown” to, and credited by the official banking system with a near-zero role in 2002, but were worth about $60 trillion and turnover-wise represented about 25% of the global bank-finance system at end-2011.
Key players in shadow banking include finance companies, entities offering some kinds of banking services (such as loans, credits and money transfers) using asset-based commercial paper, the large and dark category of Structured Investment Vehicles (SIVs), hedge funds supplying credit to certain clients and also aiding their tax evasion, money market mutual and other funds, major infrastructure and natural resources firms operating commercial trade, stock and share-based lenders, special “limited purpose” financial companies (called LPFCs), and Government sponsored enterprises (GSEs).
This last category, since 2008, now effectively includes a large slice of the world's private banks, due to repeated and ongoing “bail outs” of nominally-private banks, by governments. This also shows the sequence of change. Since about 2000 real banking and shadow banking have met, mixed and mingled. Certainly by 2008, this is the reality and implies that “repairing and restoring” the global financial system will be much harder than we are told to believe.
Not exactly all we need to know about the SBS, but underlining its power to bring down the Temple, the markets for mortgage-backed securities were great examples of the SBS, before the 2008 financial crisis. Entities playing these markets borrowed from investors in liquid short-term markets, using their cash to buy long-term supposedly safer mortgage-backed securities, generating a profit on the difference or 'spread' in interest rates/rate of return. The main characteristic of the SBS – extreme rapid change from growth to contraction – was shown by the way shadow banking entities reacted to the turnaround of mortgage-backed securities as interest rates rose. They sold “everything which wasn't nailed to the floor”. This squeezed the spread on “subprime loans” for housebuying in the US, triggering the 2008 crisis.
IN MAY, SELL AND GO AWAY
This old adage of stock exchange players in fact happened in June 2013 rather than May – possibly due to climate change making June feel like a chilly May or the delayed response of global financial players, groggy with junk information. By late June 2013 there is now clear daily powerful action to “nudge up equities”, but this not necessarily victorious action operated by the “PPT” (plunge protection team) to stop the rot and to keep equities (and oil, but not gold) flying, ignores the way the SBS responds and reacts to financial uncertainty. It also forgets the new and real power of the SBS.
How the SBS reacts and responds to the US Fed's taper-down promise or threat will be critical. Our previous experience of how the totally-unregulated “informal” SBS react to any clear signal of End of Party Time shows that its basic profile and 'raison d'exister' - low reserves and high leverage - means it always liquidates and sells out at the slightest hint of a major turnaround in trading conditions. The key threat of the SBS “repairing and restoring” its own finances poses a direct threat to the pie-in-the-sky efforts to repair and restore Humpty Dumpty global finance markets and their traditional players – the regulated private banks. Basically this results from the leverage that SBS players employ - by not holding anywhere near as much reserves as regulated traditional banks. This delivers them high profits during good times – and the exact opposite during bad times.
Leverage is a proverbial double-edged sword as any banker (shadow or otherwise) knows.
Copybook examples of how the SBS pulled down the Temple, or massively intensified a stock exchange panic phase, extend back well before 2008 and the “subprime crisis”. On example was the US energy trader Enron Corp. and its linked scandal (Enron filed for bankruptcy in Dec 2001), where structured investment vehicles (SIVs) were used to hide losses caused by off-balance-sheet operations. These SIVs, created literally from thin air by major US and international banks (especially French, German, Japanese), were essentially designed to lever up the apparent value of shareholder equity in Enron, to as much as 25 – 90 times its value in real terms, based on share price values preceding and following the scandal. The complex fraud operated by Enron's “architects” including Lay, Skilling and Fastow utilised various SBS bank-equivalent shell entities including trusts to firstly understate all liabilities while overstating shareholders' equity, and secondly to circumvent all “harmful” (that is truthful) accounting rules.
Actual or net losses from the Enron collapse are hard to quantify in a similar way to losses from another example of “pure and simple fraud” but not including the SBS – the Bernie Madoff scandal. The Enron scandal, much more sophisticated than the Madoff scam, fully applied the power of the SBS and was a worldwide operation. China's shadow banking system, today, is a great current example of the “systemic” risks generated by the SBS. Over recent years (2010-2013) some estimates, for example by KPMG of only the category “trusts” in China indicate a growth rate in nominal assets of at least 50%-per-year. Back-to-back with China's partly unregulated insurance industry, another key player in the SBS, these two categories of “shadow banking” in China probably control assets equivalent to 33% of the Chinese “formal” and regulated bank sector. As Chinese authorities know very well, its national SBS is extremely leveraged, not regulated, and sets a systemic rising risk to the economy.
REGULATING THE SBS – ALWAYS TOO LATE
We can suggest the global SBS grew so fast, so explosively that it outstripped all and any attempts to regulate it. To be sure, we can also add the guile, subterfuge and lying of SBS players using every trick in the book to keep afloat.
Since the turn of the century, the number, type and range of SBS structures and “operating modes” has also exploded, extending down to operations as apparently marginal or high-risk as the Bitcoin craze and “penny banking” in Bangladesh. Extending upwards and posing a direct threat to the future, SBS ideology is now embedded in the world's central bank-private bank duopoly, the IMF and BIS.
Attempts at regulating the SBS, in the US, were especially triggered by the Enron scandal we can note. New banking rules originating in the US include the BIS-related “Basel rules”, which concern attempts at raising capital requirements for banks “exposed to” unregulated financial institutions, that is the relationship of regulated private banks to unregulated SBS entities. These Basel rules, after mulling and modification by the BIS, essentially seek to transfer risk from SBS players, to private banks, through increasing the latter's obligatory capital reserves.
In other words, this is an outright victory for the SBS.
Due to the degree of danger now being better known, Basel rules for private banks are far from the only attempts being made to reduce the exposure of the global financial system to the SBS. Rules designed to regulate the shadow banking industry itself may be forthcoming from the US Financial Stability Board, Securities and Exchange Commission (SEC), the Chinese Banking Regulatory Commission, UK, German, French and European regulators, the European Commission, and even at UN level. The recently strengthened international financial reporting standards (IFRS) for accounting will likely be extended on a much broader basis, in an attempt to capture the extent of operations and impose some control on certain or main segments of the SBS. Linked and rapidly-increasing action by national regulators (for example the US FATCA) and at G8 level to track down and repress tax dodgers, especially tax evasion by the operation of hedge funds is another example.
THE IDEOLOGICAL QUANDARY
The SBS and its fantastic growth – and power to do harm – was only possible because of ideology based “de-regulation” of finance markets, a process that has operated since the start of the “neolib revolution” at the start of the 1980s. The free market ideology is for the least ambiguous about banking and especially formal-versus-informal banking.
By decentralizing lending, shadow banking can have both positive and negative consequences. Decentralization can increase consumer welfare by expanding the variety of funds and financial products available to users, allowing them more choice in “tailoring” their portfolios to their own preferences. If the financial system was “totally decentralized” it might in theory be more robust in the face of negative shocks by distributing losses among many small financial institutions, with smaller firms failing but without threatening overall market stability. This would be the radical opposite of the TBTF or "too big to fail" syndrome affecting the large private regulated banks.
As with all “neolib ideology” however this rosy outlook breaks down completely when scale increases: small sized decentralized banking works – both in history and in less developed countries today – when market size, turnover, financial product complexity (and other parameters) are small. The SBS applied to giant globalized financial markets of today is an insanely risky gamble, and a fitting tribute to the bankrupt (and bankrupting) ideology of neoliberalism.
The reasons why allowing a huge SBS system to emerge and evolve, the seeing its role from the Enron scandal to the 2008 subprime crash – and panicking – is the real world sequence of institutional and political response to shadow banking, and can be explained several ways. One major factor is complexity. The SBS is extremely complex and operates at all scales of financial operations, from the tiniest to the biggest. Various kinds of “ex post facto” regulatory attempts like the US Dodd-Frank Act only seek to regulate SBS activity in the financial derivatives market, proving for starters the SBS is heavily present in this “large and sophisticated” financial market. For many analysts and academic experts looking at SBS, such as finance law expert Steven L Schwarcz, one key basic weakness of the SBS is “information failure”, or as Schwarcz puts it: “Some parts of the shadow-banking network are so complex that even some finance experts view them as incomprehensible”. In brief, the financial assets and operations concocted by the SBS, at its “high end”, are so arcanely complex they probably have no meaning, making it impossible to understand them or assign any meaningful risk (or reward) to them. Information failure is therefore hard-wired, almost certain, and also easy.
As the Bitcoin craze however shows, and a host of latterday Internet non-bank operators (like Paypal and Skype) also show, the SBS is going to be very hard to eradicate. Also, formal regulated banking is most surely and certainly going to keep mutating or evolving towards SBS methods and structures. This will be need to be recognized and then formalized – but until then the huge potential for the SBS to “pull down the Temple” will remain.
By Andrew McKillop
Contact: xtran9@gmail.com
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.
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