The boom in market-based finance has taken risks away from regulated lenders, but recent crises show they’re still exposed.
Banks are far stronger and more stable than before the 2008 crisis, as I’ve written before. But they remain directly exposed to the market-based version of finance that has ballooned in the past decade.
And that exposure can be far more dangerous than expected when a very large fund or group of funds hits big problems
Let’s first take a step back. Market-based finance – often called shadow banking – covers all the ways in which companies or households get funding from investors in capital markets. Those investors include insurers, pension funds, hedge funds and myriad vehicles known by obscure acronyms.
Shadow banks controlled $225 trillion at the end of 2020, or nearly half of all global financial assets
Hidden leverage is hard to quantify, obviously, but it has certainly grown among shadow banks during the long years of ultra-low yields.
Global supervisors at the Financial Stability Board call these non-bank financial intermediaries.
Paul J. Davies Bloomberg 17 november 2022
Financial Stability Board
The core, and still unanswered, questions of the great financial crisis — why are banks so special? Yes, the major US banks are far safer and better capitalised than they were before 2008. But why do they chafe at single-digit capital requirements when businesses in any other industry hold multiples of that?
Everything from an increasingly volatile T-bill market to a home lending market now dominated by shadow banks
Rana Foroohar FT 25 September 2022