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10/3 0/2 016 T he E co nom ist e xp la in s: H ow sh adow b anki ng w orks | T he E co nom ist
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O N J A N UAR Y 5 th , in a c a m paig n s p eech in N ew Y ork ,
A m eric a n s e n ato r B ern ie S an ders p le d ged t o b re a k u p
ban ks t h at w ere d eem ed “ to o b ig t o f a il” a n d v o w ed t o
p ut a le a sh o n t h eir s h ad ow y c o u sin s. J an et Y elle n ,
Fed era l R ese rv e’s c h air , h as a d m it te d t h at s h ad ow b an ks
p ose “ a h uge c h alle n ge” t o t h e w orld e co n om y. I n a n
ed it o ria l f o r t h e N ew Y ork T im es in D ecem ber, H illa ry
C lin to n c a lle d f o r t o u gh m ea su re s t o c o n ta in t h e g lo bal
bogeym an . P olit ic ia n s a n d e co n om is ts w ho o fte n h ave lit tle in c o m mon , u nan im ou sly a gre e t h at
sh ad ow b an kin g, le ft t o it s o w n d evic es, h as t h e p ote n tia l t o t r ig ger a n oth er f in an cia l c o lla p se . W hat
are s h ad ow b an ks a n d w hy is t h ere s u ch a f u ss a bou t t h em t h em ?
The t e rm “ sh ad ow b an k” w as c o in ed in 2 0 07 b y P au l M cC ulle y o f P IM CO , a b ig b on d f u nd t o d esc rib e
ris k y o ff b ala n cesh eet v eh ic le s h atc h ed b y b an ks t o s e ll lo an s r e p ack aged a s b on ds. T od ay, t h e t e rm is
u se d m ore lo ose ly t o c o ver a ll f in an cia l in te rm ed ia rie s t h at p erfo rm b an klik e a ctiv it y b u t a re n ot
re g u la te d a s o n e. T hese in clu de m obile p aym en t s y ste m s, p aw nsh op s, p eerto p eer le n din g w eb sit e s,
h ed ge f u nds a n d b on dtr a d in g p la tfo rm s s e t u p b y t e ch nolo gy f ir m s. A m on g t h e b ig gest a re a sse t
m an agem en t c o m pan ie s. I n 2 0 13 in vestm en t f u nds t h at m ake s u ch lo an s r a is e d a w hop pin g $ 97
billio n w orld w id e. C om pan ie s lo okin g f o r c a sh a ls o le a n o n b on d m ark ets t h at o ffe r e x tr a ord in arily lo w
in te re st r a te s. G lo bally , b etw een 2 0 07 a n d 2 0 12 , f ir m s t h us r a is e d $ 1.7 t r illio n b y is su in g c o rp ora te
b on ds. M on eym ark et f u nds t h at in vest in s h ort t e rm s e cu rit ie s lik e U S t r e a su ry b ills h ave t a ken o ff t o o.
In C hin a a lo n e, t h ey g re w s ix t im es t o 2 .2 t r illio n y u an ( $ 341 b illio n ) b etw een m id 2 0 13 a n d D ecem ber
2 0 15 . I n D ecem ber t h ey h it a s w eet s p ot w hen F ed era l R ese rv e h ik ed in te re st r a te s f o r t h e f ir st t im e in 10/3 0/2 016 T he E co nom ist e xp la in s: H ow sh adow b anki ng w orks | T he E co nom ist
h ttp ://w ww.e co nom ist .co m/n ode/2 1689867/p rin t 2/2
n ea rly t e n y ea rs. T he F in an cia l S ta bilit y B oard , a n in te rn atio n al w atc h dog e stim ate s t h at g lo bally , t h e
in fo rm al le n din g s e cto r s e rv ic ed a sse ts w orth $ 80 t r illio n in 2 0 14 u p f r o m $ 26 t r illio n m ore t h an a
d eca d e e a rlie r.
S h ad ow b an ks h ave f lo u ris h ed in p art b eca u se t h e t r a d it io n al o n es, b atte re d b y lo sse s in cu rre d d urin g
th e f in an cia l s lu m p, a re u nder p re ssu re . T ig h te r c a p it a l r e q u ir e m en ts a n d f e a r o f h ea vy p en alt ie s h ave
k ep t t h em g ro u nded . I n C hin a, w here b an ks a re d is c o u ra ged f r o m le n din g t o c erta in in dustr ie s a n d
are m an date d t o o ffe r f r u str a tin gly lo w in te re st r a te s o n d ep osit s , n on b an ks f ill t h e g ap . A bou t t w o
th ir d s o f a ll le n din g in t h e c o u ntr y b y s h ad ow b an ks a re in f a ct “ b an k lo an s in d is g u is e ”, r e ck on s t h e
B ro okin gs in stit u tio n , a t h in k t a n k. C rit ic s w orry t h at u nlik e b an ks, w hic h le n d a gain st d ep osit s f r o m
cu sto m ers, n on b an ks lo an m on ey u sin g in vesto r’s c a sh a n d r o ta tin g lin es o f c re d it . T his is e sp ecia lly
r is k y w hen s k it tis h in vesto rs w ho b et o n s h ort t e rm g ain s w it h dra w t h eir m on ey a t o n ce. B ut n on b an k
fin an cin g n eed n ot a lw ays b e a b ad t h in g. I t o ffe rs a n a d dit io n al s o u rc e o f c re d it t o in div id uals a n d
bu sin esse s in c o u ntr ie s w here f o rm al b an kin g is e it h er e x p en siv e o r a bse n t. I t a ls o t a kes s o m e b u rd en
o ff b an ks w hic h h ave b ig “ m atu rit y m is m atc h es” ( th e d if fe re n ce b etw een t h e a m ou nt o f t im e a
d ep osit o r's m on ey is p ark ed in t h e b an k m in us t h e t im e t h at it is lo an ed o u t) .
A nd b ela te d ly , r e g u la to rs, t o o, a re w akin g u p t o t h e n ew f in an cia l o rd er. B an ks m ust n ow d ecla re
str u ctu re d in vestm en t v eh ic le s o n t h eir b ala n ce s h eets . A uth orit ie s h ave c o n sid ere d im posin g le vera ge
lim it s o n v a rio u s f o rm s o f s h ad ow b an ks in A m eric a a n d E uro p e. I n J an uary la st y ea r, A m eric a ’s
F ed era l H ou sin g F in an ce A gen cy p ro p ose d n ew r u le s t h at w ou ld r e q u ir e a ll n on b an ks t o h ave a
m in im um n et w orth o f $ 2.5 m p lu s a q u arte r p erc en ta ge p oin t o f t h e o u ts ta n din g lo an s to ck t h at t h ey
se rv ic e. O nly t h en w ou ld t h ey b e a ble t o s e ll t h eir lo an s t o F an nie M ae a n d F re d die M ac, w hic h b u y
A m eric a n m ortg ages f r o m b an ks, b u ndle t h em in to s e cu rit ie s a n d r e se ll t h em t o in vesto rs w it h a
g u ara n te e. T he m ove a im s t o p ro te ct t h e t w o g overn m en t b ack ed h ou sin g g ia n ts a gain st u nder
c a p it a lis e d le n ders. I t is a s m all s ta rt t o r e in in a n in dustr y t h at a cco u nts f o r a q u arte r o f t h e g lo bal
fin an cia l s y ste m .
