Where Do Shadow Banks Get Their Money?
Your Deposits
Regulators need to address the growing links between traditional banks and the nonbank financial institutions that are increasingly taking over their business.
Banking is an inherently fragile endeavor. By funding long-term investments with money they’ve promised to pay back at short notice, banks expose themselves to the risk that customers will demand their cash back all at once.
Since such runs can cripple the economy, governments provide backstops (such as deposit insurance and central-bank loans) and impose regulations aimed at ensuring resilience.
Other financial institutions, however, persistently seek to replicate banking without the regulation.
It’s easy to see how things could go wrong. In a crisis, the shadow banks could place overwhelming cash demands on banks, requiring officials to step in with emergency liquidity — much as happened during the onset of the coronavirus pandemic in 2020, or with UK pension funds in 2022.
If the available collateral — in this case, largely subprime business loans and hard-to-sell real estate — proved inadequate, the result would be either a painful credit crunch or losses for taxpayers.
The Editorial Board Bloomberg 21 maj 2024
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