Tip of Debt Iceberg
Excessive leverage puts everyone at risk.
Ideally, nobody would have to worry about the burgeoning and multifaceted realm of nonbank finance: Let hedge funds, securities dealers and the like take whatever risks they want, as long as they bear the full consequences.
Yet time and again in recent years, concentrations of leverage — or borrowed money — have collided with unexpected events to wreak havoc, catching authorities off guard and sometimes requiring emergency measures to avert broader economic damage.
Leverage is the two-edged sword of finance.
The ability to borrow multiples of their own capital empowers people to buy homes, businesses to invest, and banks and other intermediaries to profit by making it all go smoothly.
But it also allows them to lose more money than they have.
A hedge fund might put up $20 to get $100 in exposure to stocks via derivatives
The resilience of nonbanks matters, given their growing role in the global economy.
As of 2023, their assets amounted to an estimated $239 trillion, or more than 225% of global gross domestic product
— compared with 178% for traditional banks.
Bloomberg editorial 4 april 2025
‘Shadow banks’ have grown rapidly and, like banks, are exposed to risk from higher interest rates
SVB’s core problem was that it owned a lot of government debt funded by unstable deposits. As interest rates rose sharply last year, the mark-to-market value of that debt plummeted, and deposits became more expensive and scarcer.
A lot of banks own similarly devalued bonds. But that is just the tip of a debt iceberg.
Since the end of 2009, total debt owed by governments, business and households has risen 90% to $68 trillion.
Banks are the most visible debtholders, but, collectively, just as much debt is held by pension and mutual funds, private-credit funds, life insurers, business-development companies, hedge funds, and other nonbanks—or, as they are sometimes called, shadow banks.
Shadow banks have grown considerably since the global financial crisis. The fastest-growing segment is private credit—loans to companies generally too small to issue bonds but who want to avoid more restrictive bank loans.
Since the start of 2008, private credit has grown almost sixfold, to $1.5 trillion, according to the IMF—bigger than the high-yield bond or leveraged-loan markets.
At $4.4 trillion, those three markets are worth more than all banks’ commercial and industrial loans, at $2.7 trillion.
Greg Ip WSJ 26 April 2023
https://www.wsj.com/articles/banking-problems-may-be-tip-of-debt-iceberg-262b6d0e
Shadow banks manage $63tn in financial assets — up from $30tn a decade ago.
https://englundmacro.blogspot.com/2023/04/post-2008-regulations-may-save-us-from.html
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