U.S. "shadow banks" have
reached $15 trillion to $25 trillion in size and are a growing part of overall
lending, according to a new report from the International Monetary Fund.
In its latest Global Financial Stability Report, the IMF reports that the shadow banking system is
roughly equivalent to the traditional banking system in terms of size and risk.
Shadow banking is defined in different ways but generally refers to financial
institutions outside of banks insured and regulated by the government, such as
money market mutual funds, hedge funds and other non-bank financial firms.
The report includes a new accounting of
total shadow banking liabilities undertaken by the Financial Stability Board,
an international body that coordinates regulators.
The report says shadow banking can
"complement" traditional banking and allow credit to flow places it
otherwise wouldn't, but also cautions that the size of the market could present
difficulties to regulators trying to prevent panics like the one that
threatened to bring down the economy in 2008, which itself was partly caused by
failures among shadow banks, such as the Reserve Primary Fund, a large money
market mutual fund that nearly failed in the fall of 2008.
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Whether the rise of shadow banking
implies an "overall increase or decline in systemic risk is difficult to
assess at this juncture — but there are some indications of increased market
and liquidity risk in advanced economies," the report concludes.
In the wake of the financial crisis,
Congress passed the 2010 Dodd-Frank financial regulation reform law to prevent future bank failures that would
lead to taxpayer bailouts. In recent months, however, regulators such as
Treasury Secretary Jack Lew have acknowledged that they may need further
regulatory tools to address risks taken on by shadow banking businesses. But
shadow banking is largely driven by the desire to avoid regulation.
"Shadow banking tends to take off
when strict banking regulations are in place, which leads to circumvention of
regulations," Gaston Gelos, chief of the Global Financial Analysis
Division at the IMF, said in a note introducing the report.
The report also warns that "some
of the fastest-growing shadow banking activities substitute for, rather than
complement, traditional banking."
And it calls for a "more
encompassing approach to regulation and supervision that focuses both activities
and on entities and places greater emphasis on systemic risk ... and improved
transparency.”
Comments
Non-bank, financial firms would include the
major retirement fund holders like Vanguard, Fidelity and TIAA along with
insurance companies, private investment companies and hedge funds. Hedge funds
allow investors to hedge their bets, like a bread manufacturer buying wheat
futures and bet against almost anything like currencies or variable interest
rates. It also includes government
usurped lending operations with monopoly power over home mortgages at Fannie
and Freddie and student loans at Sallie. This is where the BIG MONEY comes and
goes.
Banks were left with the left-overs like bank
account administration and brokerage services.
Their low interest rate payments discourage leaving money in their
accounts. The BIG banks like Bank of America and Wells Fargo have credit card
administration, personal and business lending and money transfer ability. Commercial Banks lend to local businesses
with close customer contact and are the most vulnerable to local economic
conditions. Banks handle Bond sales for
fees and government bond sales generate big income. Banks also like owning land and businesses
with an eye toward buying low and selling high, but that’s hard to do unless
they can find some taxpayer money to subsidize their folly.
The term “shadow bank” should be left to the
real gamblers like the hedge funds and those insurance companies who specialize
in insuring the down-side of investments like CIG. These guys play “what if” with large
investments. Banks without these
departments are left with low margin business.
Government “guarantees”, bailouts, required
reserve minimums, regulations or lack thereof and tax breaks are the levers
government uses to allow advantages to slide around within the financial
services industry. Milton Friedman
trained conservative economists will have the best answers to this problem, but
the “players: won’t like these answers.
As the Federal Reserve finally runs out of
reasons to continue QE and the economy continues to decline, the fate of the
highly leveraged firms will be quietly resolved. They are all hanging around
Congress trying to buy the best deal they can get. Us regular folks will get to pay the bill, as
usual.
The federal government will be looking for
the large investment firms to buy T-Bills that pay low interest rates to fund
the federal debt and deficit spending and will gladly give them more advantages
to get that to happen. The BIG gamblers
won’t be touched because they currently run the planet.
Norb Leahy Dunwoody GA Tea Party Leader
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