Stricter
Regulations & Shadow Banking
10/1/2014
Stricter regulations, low rates fueling shadow
banking growth
By Steve Goldstein Published: Oct 1, 2014
WASHINGTON (MarketWatch) — Stricter regulation of banks and low interest rates are fueling the growth of so-called shadow banking worldwide, the International Monetary Fund said Wednesday.
Shadow banking refers to lending outside of the banking system, from institutions such as money market funds, hedge funds, private-equity firms and broker/dealers. Though difficult to measure, shadow banking is as much as $25 trillion in the U.S., $22.5 trillion in the euro area, $6 trillion in Japan and $7 trillion in emerging markets, the IMF says.
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By Steve Goldstein Published: Oct 1, 2014
WASHINGTON (MarketWatch) — Stricter regulation of banks and low interest rates are fueling the growth of so-called shadow banking worldwide, the International Monetary Fund said Wednesday.
Shadow banking refers to lending outside of the banking system, from institutions such as money market funds, hedge funds, private-equity firms and broker/dealers. Though difficult to measure, shadow banking is as much as $25 trillion in the U.S., $22.5 trillion in the euro area, $6 trillion in Japan and $7 trillion in emerging markets, the IMF says.
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“Shadow banking tends to
take off when strict banking regulations are in place, which leads to
circumvention of regulations.
It also grows when real interest rates and yield spreads are low and investors are searching for higher returns, and when there is a large institutional demand for ‘safe assets,’ for example from insurance companies and pension funds,” said Gaston Gelos, chief of the global financial analysis division of the IMF, in a statement. |
The risks from shadow banking can come from
their reliance on short-term funding, which can lead to forced asset sales and
downward price spirals.
The IMF points out that not all shadow banking — such as money-market funds — is particularly risky, but these funds in both the U.S. and Europe are now holding a higher proportion of less-liquid assets, like commercial loans.
That could be problematic if the claims given to investors are very liquid. The Securities and Exchange Commission has taken steps to address their concerns, by allowing money-market funds to impose liquidity fees or suspend redemptions temporarily.
(Please visit link to see visual graph unable to paste here thank you)
The growth in shadow banking in China “stands out and warrants close monitoring,” the IMF added.
In China, wealth-management products accounted for 25% of gross domestic product by early 2014, growing threefold since early 2011. The IMF says these products share characteristics of the structured investment vehicles and collateral debt obligations used by U.S. banks before 2008 to keep loans off their balance sheet.
The global financial system nearly collapsed from the weight of leveraged investments on suspect mortgages in 2008.
http://www.marketwatch.com/story/stricter-regulations-low-rates-fueling-shadow-banking-growth-2014-10-01
http://www.dinarrecaps.com/our-blog/stricter-regulations-shadow-bankingThe IMF points out that not all shadow banking — such as money-market funds — is particularly risky, but these funds in both the U.S. and Europe are now holding a higher proportion of less-liquid assets, like commercial loans.
That could be problematic if the claims given to investors are very liquid. The Securities and Exchange Commission has taken steps to address their concerns, by allowing money-market funds to impose liquidity fees or suspend redemptions temporarily.
(Please visit link to see visual graph unable to paste here thank you)
The growth in shadow banking in China “stands out and warrants close monitoring,” the IMF added.
In China, wealth-management products accounted for 25% of gross domestic product by early 2014, growing threefold since early 2011. The IMF says these products share characteristics of the structured investment vehicles and collateral debt obligations used by U.S. banks before 2008 to keep loans off their balance sheet.
The global financial system nearly collapsed from the weight of leveraged investments on suspect mortgages in 2008.
http://www.marketwatch.com/story/stricter-regulations-low-rates-fueling-shadow-banking-growth-2014-10-01
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