April 20, 2021

Banking in the shade, more than 51 billion off the radar

Banking in the shade, more than 51 billion off the radar


They say that the bank expiated its sins during the worst years of the financial crisis. Not only in Spain, but worldwide. The bankruptcy of Lehman Brothers It became a symbol of the financial system back in 2008 and, since then, the regulator has endeavored to guarantee a lifeboat to this sector for when they come back badly given. Requirements of provisions, solvency ratios, surveillance of dubious assets … governments do not lose sight of even a moment the smallest stone in the shoe that can sneak. The control over banking was never like today; but not over all of it. That halo of opacity that surrounds financial markets is evident in the call «Shadow banking» («shadow banking»). And its risks increase at the same pace as its portfolio.

This niche -referred technically to non-banking financial institutions but acting as such granting credit, as may be the case of certain investment funds- has been focusing the attention of supervisors for years, although control over their activity remains in place marshy. "The growing risk taking by non-bank entities makes them more interconnected and vulnerable to possible shocks in global financial markets," said the European Central Bank (ECB) in its financial stability report for November. And he warned that these deregulated financing mechanisms "have continued to reduce their liquidity reserves", as well as their most liquid assets. That is, they invest with greater aggressiveness and credit risk over the years. The reality is that, today, the "banking in the shade" plays record numbers.

The ECB on alert

Mario Draghi, president of the ECB, had already given a timid alarm in September regarding these entities. While noting that "it is playing an increasingly important role in the financing of the economy," he claimed the member states more accurate and severe mechanisms of data analysis: "The ability of policy makers to act depends on the availability of high-quality data. The data allows policy makers to identify, analyze and quantify emerging risks. The data also provides policy makers with the knowledge they need to be able to point and calibrate their tools and be aware of possible side effects or attempts to circumvent regulations. "

All this before a growing reality that already accumulates 14% of the total assets of the bank. According to the last report of the Financial Stability Board (FSB), the global "shadow banking" already accumulated 51.57 billion dollars in 2017, 57.3% more than ten years ago. Indonesia, Argentina, Brazil, India, Turkey … are the regions with the highest growth rates in this regard; Emerging or developing countries or countries with problems are the ones that add up, after an increase in the "shadow banking" of the 8.5% in 2017. Figures that, by themselves, do not pose a problem … except when bubbles start to generate in the financial markets.

Regulation of the sector

"Banking is a business based on trust, and this is achieved through regulators that ask for levels of solvency and liquidity in a continuous manner; and "shadow banking" does not have to comply. And by not doing it they are limited in their attempt to come to a good end in their business», Says Manuel Romera, director of the Financial Sector at IE Business School. In other words, that accumulating debt in an uncontrolled manner can hinder the viability of these entities and infect traditional banking.

"The Commission takes the issue of financial stability very seriously and remains vigilant to ensure the adequacy of the regulatory framework when it comes to the evolution of the financial system. We are monitoring the developments and potential risks throughout the financial system on a continuous basis, "say community sources. And they continue: "If we identify activities that are not regulated or that are not adequately regulated, or residual risks for financial stability for which there are no political tools to address them, it is our responsibility to act as responsible for the policies." A message of calm from the European institutions but that does not satisfy the experts and the sector.

Such is the case that the Spanish Banking Association (AEB), in the words of its spokesman José Luis Martínez, calls the supervisors to fix their eyes on "shadow banking" and its potential danger: «The growth of non-bank financing to large companies is compatible with the importance of bank financing, both companies of all sizes and families. However, banks are subject to strict regulation and supervision, unlike banks that provide financing but are not banks. It is important that the authorities monitor the risks assumed by non-bank financial intermediaries in order to preserve financial stability and avoid systemic risks. " They reach out to all "help" to give credit that may arise in the markets, but always competing on equal terms and with demands that do not put the entire system at risk.

The Bank of Spain estimated the size of "shadow banking" at 5% of the total assets of national financial institutions. And, specifically, the FSB calculates that in our country there was, in 2017, 382,700 million dollars in assets under the control of these entities. 21% more than in 2010, the first year of the series that manages Financial Stability Board. Despite everything, the banking association AEB reminds that this organization did not warn of systemic risks for the entire banking landscape, neither in specific countries nor at a global level.

A different position to that maintained by the current vice president of the ECB and former Minister of Economy, Luis de Guindos, which referred to "shadow banking" in a recent speech in November: "The asset management sector is highly connected to other parts of the financial system through ownership links, common exposures to assets and the provision of funds to wholesale to banks. Mutual funds are not just important depositors in banks; they also provide long-term financing through the purchase of debt securities issued by banks ». These funds, which hold some 400,000 million euros of bank debt in the Eurozone, awaken the distrust of the community institution. "Any potential impact on the investment fund sector can quickly spread to other parts of the financial system," said Guindos.

Economic benefits

In spite of everything, there are those who also know how to see the benefits that the "shadow banking" credit brings to society and companies. The European Commission itself emphasizes, according to official sources, that it can "support investment and the economy in general, since it diversifies the sources of financing. It can also act as a kind of '' spare wheel '' in times of reduced bank loans ». Advantages that also review from the AEB. The employers stress that competition in the banking sector will always be positive "if it presents itself with greater integration in the European financial markets and deepens the banking union". In short, the sources consulted put in value that the «Shadow banking»Power certain aspects of the economy. Although not always, since various reports have warned that expansive phases are a lever that drives the cycle, but can also increase the stages of recession.

Likewise, Romera, from IE, advocates keeping the door open to the financing provided by these non-banking entities: «The main benefit is the ability to get more financing, more actively and generated more competition in the market, which in the end is good. Do not put doors to the field, but seek balance ».

These balances are those that regulators try to calibrate worldwide, although from the European Union They insist that "shadow banking" is not a niche without regulations. Moreover, sources of the Commission point out that they have substantially improved the control exercised over, for example, investment funds.

Opposite visions at times but all with the aim that the "shadow banking" comes to light as the traditional sector already did. Now we just need to check if this financing is becoming a debt bubble as some say. For now, it continues to grow. At 8.5% it did so in 2017, in some countries more than in others, but in almost all upwards. Shared "growth" … as well as the possible risks.


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