We argue for better language to describe various functions in financial markets. There are banks and bank holding companies that offer a wide variety of credit intermediation and agency services. There are nonbanks including hedge funds and asset managers that provide liquidity and offer credit intermediation. Calling something Shadow Banking doesn’t work when we are talking about financial market activities since banks can perform supposedly Shadow Banking activities, and nonbanks like insurance companies and corporates issue funding obligations, like a bank, on a regular basis. The language doesn’t work. We propose here some straight-forward alternatives based on function, not form.
The Fed has published a staff report on the emergence of new banks that is sure to confound and distress some market participants. In the report, “Hybrid Intermediaries“, author Nicola Cetorelli argues that some of today’s nonbank intermediaries look very similar to earlier nonbank conglomerates that have become banks post-Lehman. BlackRock in securities lending is cited as an example. The subtext argument here is whether BlackRock and firms like it are SIFIs, should be forced to become bank holding companies, or receive some other form of bank-like regulation.
On October 30th the FSB released “Global Shadow Banking Monitoring Report 2014”, their annual examination of the world of shadow banking. Shadow banking is described as “non-bank credit intermediate with bank-like systemic risks…includ[ing] maturity transformation, liquidity transformation, imperfect risk transfer, and leverage…” We take a look at the report.
In October 2014, the International Monetary Fund (IMF) published its Global Financial Stability Report (“the Report”) entitled “Risk Taking, Liquidity, and Shadow Banking: Curbing Excess while Promoting Growth”. The report asserts that global economic recovery is dependent upon “accommodative” monetary policy in advanced economies by way of shadow banking. At the same time, the Report cautions that prolonged accommodation may also encourage excessive financial risk.
The October 2014 Global Financial Stability Report (GFSR) finds that six years after the start of the crisis, the global economic recovery continues to rely heavily on accommodative monetary policies in advanced economies. Monetary accommodation remains critical in supporting the economy by encouraging economic risk taking in the form of increased real spending by households and greater willingness to invest and hire by businesses. However, prolonged monetary ease may also encourage excessive financial risk taking.
Interesting news and articles from the last week that we haven’t gotten a chance to talk about elsewhere, including MiFID and liquidity, a suggestion that Moody’s has preferenced ratings of bonds held by its corporate owners, and securities lending CCPs. Read on.
Sheila Blair, former head of the FDIC and now head of the private, nonpartisan Systemic Risk Council wrote an article in the July 24th Wall Street Journal “The Federal Reserve’s Risky Reverse Repurchase Scheme”. She has joined a group of regulators and former regulators who have some hesitation about the Fed’s RRP program.
We’ve seen several recent news articles and commentary on Shadow Banking, from The Economist’s special report to news on China’s CITIC. Below are the most interesting articles we’ve seen lately.