This is a Google Map of the City of London:
It’s a “square mile” because back in the day — before phones, fax machines or the internet was invented — representatives from the key settlement banks had to gather in person to net and settle outstanding debts and claims against each other (a mile essentially being about as far as messengers could be asked to travel in a day). Read more
Most of us know it as shadow banking. Others refer to it as non-bank lending. But a whole new nomenclature — “market-based financing” — is growing in popularity, making the whole thing sound a lot less shadowy, rightly or wrongly.
Nathan Sheets, Under Secretary for International Affairs at the Treasury, in any case urged us to call it that when he spoke about the phenomenon in a speech earlier this year, a sentiment that has also been echoed by the Financial Stability Board.
We refer to this because a similar rebranding effort is currently going on in the world of P2P lenders, many of whom now prefer to be described as operating in the sphere of “marketplace lending“. Furthermore, some analysts we’ve spoken to don’t consider P2P lenders to be shadow banking institutions at all. Some simply call this new source of financing “internet funds”. Read more
Most people know that China’s currency is classified according to trading conditions. There is, for example, CNY, which refers to onshore yuan. There’s CNH, which refers to Hong Kong (offshore) yuan. And then there’s NDF, the non-deliverable forward market.
What differentiates these currencies are the terms and conditions that apply to those particular market zones, and how easy or not it is to transfer currency in and out. As implied yields of the respective markets show (chart via BNP Paribas), the rates of return for all of these markets varies significantly — because they are, to some extent, entirely different currencies:
Last year the Federal Reserve and the Office of the Comptroller of the Currency issued new leveraged lending guidance designed to discourage big banks from underwriting risky new loans. Off the menu were loans with more than six times leverage, or that exhibited certain signs of weak underwriting or covenants. Since then, the regulators have double-down on the guidance — warning banks they should hardly ever do loans that are unlikely to pass muster.
So, more than a year later, it’s worth asking whether the guidance has had any effect. Read more
Not our words but Societe Generale’s, or at least their China macro strategist Wei Yao, who believes credit risk is worse than official non-performing loan data suggests. So much worse that — while government intervention will prevent an outright crisis — a “multi-year and bumpy” landing is now expected by SocGen.
Non-performing loans are still at a fairly low level of 0.9 per cent across China, notes Wei, although about three times that amount are “special mention” loans, or those in doubt but still performing. Rates can also rise quickly, thanks in part to China’s tangled shadow banking system: in one year, Wenzhou went from the lowest rate of any Chinese city at 0.37 per cent to 2.85 per cent at the end of July. Read more
This is a follow-up to our post on “base money confusion“, which incorporates some of the ideas we’ve raised in our “beyond scarcity” series.
Let’s assume a few truths (we’re sure they’ll be up for debate, but here goes anyway): Read more
If one article sums up how ETFs have come to change the market structure of the equity universe, it’s this one from Paul Amery at Index Universe on Thursday.
As he recounts, the thing that really worries regulators is the role ETFs play in the shadow banking world today. To what degree do their security deposits fund banks, and what sorts of maturity transformation is going on behind the scenes? Also, to what degree do ETF providers fulfil a credit intermediation role by transferring capital and liquidity from savers to borrowers, even when most ETF investors are unaware of the fact that their “deposits” may not be fully capitalised at all times? Read more
FT Alphaville decided earlier this week that we are sick of the term “shadow banking”. We’ve failed to come up with an alternative, however, and in the meantime Edward Kane, a professor at Boston College, has presented a paper entitled “The inevitability of shadowy banking” at the Atlanta Fed-hosted financial markets conference.
Kane’s paper says shadowy banking is basically safety-net arbitrage. He defines it thus: Read more
Deposit insurance on non-interest bearing accounts — it was in October 2008 that the FDIC started it, through the Transaction Account Guarantee, or TAG.
Until we looked a bit more closely, we hadn’t guessed that the issue could offer much insight into the complexities of shadow banking regulation. Read more
FT Alphaville suggested on Wednesday that Dodd-Frank is likely to be a bigger boon to the shadow banking system than — as others have suggested — to European banks.
We’re still getting our heads around the right approach toward shadow banking (and how best to define it) but a couple of insights from recent speeches on the topic caught our attention and may be of interest. Read more
Gary Cohn, president of Goldman Sachs, has warned that the drive to impose more regulation on banks could cause the next crisis by pushing risky activities towards hedge funds and other lightly supervised entities, reports the FT. Goldman’s registering of concern over such shadow banks departs from its previous low profile on the matter, given that hedge funds are among its key clients. People close to the situation said Goldman executives were concerned about the build-up of risk not just among hedge funds but also entities such as the clearing houses set to take over some of the derivatives’ business from banks. FT Alphaville has a primer on the issue from July.
Have you been using the Google Books Ngram Viewer? It lets you search for any phrase across vast corpuses of digitised literature throughout the decades.
It’s quite addictive. Read more
This is not your usual sovereign contagion post.
We’ve argued once before that Ireland’s failed bondholder bailout has unleashed contagion that does not just threaten the eurozone. Sudden illiquidity could also strike banking systems across the core, returning markets to volatility last seen during the late-2008 crisis. Read more
It’s not the capital, it’s the liquidity. It’s not the Maginot Line; it’s how many Panzers are pummelling through the Ardennes beside it.
And thus it’s not Basel III; it’s what banks will do — and where they will find the liquidity and the counterparties to do so — to get around it. Read more
With a tip of the hat to Simon Johnson, here’s a Harvard paper with a curious take on two hot topics of the financial future: macro-prudence and shadow banks.
Getting the first wrong might create (more) perverse incentives in the second. Read more