A company needs financing to carry out its business project. The options available to obtain it are of three types: requesting it from a bank, seeking it in wholesale markets, or asking other types of financial intermediaries. Under the financial markets option, investors directly assume the risk. This is not the case in the other two options. The difference between them is that the credit activity of banks is transparent, supervised by authorities, and subject to strict regulation.
Shadow banking refers to intermediation activity that does not come from banks. These are therefore entities whose activity may entail risks similar to normal credit activity, but which are not regulated or supervised by authorities. Nor do they have access to central bank financing. According to the European Central Bank (ECB), the non-bank financial sector that includes this type of entity already accounts for 40% of the total in Europe. The G20 raised in 2011 the need to study them to assess the systemic risk they posed. Four years later, the Financial Stability Board rejected that they were. However, this has not entirely reassured the authorities. The latest to express concern has been the ECB, also warning of their rapid growth at an annual rate close to double digits.
What is interesting about this debate is the context in which it occurs: an ultra-expansive and exceptional monetary policy that may persist over time; a high level, a historical maximum, of private and public debt globally, higher than that existing before the crisis; strict and apparently unfinished regulation that limits banks’ margin to assume risk. It is normal that the ECB economist also expressed concern a few weeks ago about the high leverage of the non-bank financial sector. And he has not been the only one, considering that both the IMF and the BIS have repeatedly warned of the possibility of excesses in some financial markets. Banks know how to manage the risk they assume in their activity, something that no one has been able to verify in the case of these other financial intermediaries.
It is estimated that the misnamed shadow banking (they are not banks and operate openly) already amounts to 40 trillion dollars globally. This is a significant figure, even more so when one of the highest priorities among global monetary authorities is to preserve the financial stability achieved with so much effort. Expectations of monetary normalization were largely behind the instability of financial markets during the second half of last year, which resulted in a deterioration in non-bank financing conditions. Faced with turbulence in the markets, banks recovered part of the weight lost during the crisis in credit financing under very favorable conditions that still remain.
It does not make much sense for the possible official response to concerns about the non-bank financial sector to involve tightening the regulation of banks, considered by some as the natural containment wall for the risk assumed by the rest of the financial sector. In fact, at the academic level, the high regulation that banks have borne after a decade of constant changes is related to the strong growth of non-bank financing in this same period.
