What if the financial industry, in creating credit, bypasses the banks? According to the global central banks and regulators who make up the international Financial Stability Board, this type of lending constitutes "Shadow banking." That's an imprecise, overly ominous term, evoking Mafia dons writing loans to gamblers on betting slips and then kneecapping debtors who don't pay the money back on time, but the practice is nothing so Tony Soprano-ish.
Understood broadly, shadow banking is nothing new, encompassing everything from corporate bond markets to payday lending.
Recent growth in shadow banking isn't serving to disperse risk or to tailor innovative products to meet borrowers' needs.
Within this pool of nonbank assets, the FSB has devised a "Narrower" measure of shadow banking that identifies the types of companies likely to pose the most systemic risk to the economy-those most susceptible, that is, to sudden, bank-like liquidity or solvency panics.
Banks as well as nonbank lenders have grown, in other words, but the banks have done so under far stricter oversight.
"The quality of today's bank loans has declined," Peebles observes, because "Strong demand has been promoting lax lending and sketchy supply.... Companies know that high demand means they can borrow at favorable rates." Further, says Peebles, "First-time, lower-rated issuers"-companies without a good track record of repaying debt-are responsible for the recent boom in loan borrowers, from fewer than 300 institutions in 2007 to closer to 900 today.
"Although non-bank credit can act as a substitute for bank credit when banks curtail the extension of credit, non-bank and bank credit can also move in lockstep, potentially amplifying credit booms and busts," says the FSB. The porous borders between the supposedly riskier parts of the nonbank financial markets-ETFs-and the less risky ones also could work against a fast recovery in a crisis.
https://www.city-journal.org/nonbank-lending-risks
Understood broadly, shadow banking is nothing new, encompassing everything from corporate bond markets to payday lending.
Recent growth in shadow banking isn't serving to disperse risk or to tailor innovative products to meet borrowers' needs.
Within this pool of nonbank assets, the FSB has devised a "Narrower" measure of shadow banking that identifies the types of companies likely to pose the most systemic risk to the economy-those most susceptible, that is, to sudden, bank-like liquidity or solvency panics.
Banks as well as nonbank lenders have grown, in other words, but the banks have done so under far stricter oversight.
"The quality of today's bank loans has declined," Peebles observes, because "Strong demand has been promoting lax lending and sketchy supply.... Companies know that high demand means they can borrow at favorable rates." Further, says Peebles, "First-time, lower-rated issuers"-companies without a good track record of repaying debt-are responsible for the recent boom in loan borrowers, from fewer than 300 institutions in 2007 to closer to 900 today.
"Although non-bank credit can act as a substitute for bank credit when banks curtail the extension of credit, non-bank and bank credit can also move in lockstep, potentially amplifying credit booms and busts," says the FSB. The porous borders between the supposedly riskier parts of the nonbank financial markets-ETFs-and the less risky ones also could work against a fast recovery in a crisis.
https://www.city-journal.org/nonbank-lending-risks
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