Hong Kong News

Nonpartisan, Noncommercial, unconstrained.
Monday, Mar 27, 2023

Here’s where the next financial crisis starts

Here’s where the next financial crisis starts

There are ‘accidents’ waiting to happen. How to stop them isn’t altogether clear.

It couldn't happen again. Could it?

When banks blew up the global economy in 2008, regulators from Brussels to Washington scrambled to put up the scaffolding. That was all well and good, but what about the parts of the financial system that were left behind? A few ripples under the surface are now causing insiders to break out in a cold sweat.

Alarm bells are ringing about so-called shadow banks or nonbanks — not banks in the traditional sense at all, but structures such as investment funds, insurers, private equity, pension and hedge funds. Not only did they escape some of the stricter rules imposed during the last crisis but they also benefited by taking on a lot of the risks from the ordinary bank sector.

But the post-crisis good times are coming to an end. Central banks are increasing interest rates in an effort to tackle soaring inflation meaning the era of cheap money is over.

And regulators fear the vulnerabilities that have built up over the past few years are ready to explode and send shockwaves across the world.


Ominous playbook


The dwindling supply of money in the shadow banking system means "you see some of the issues that are there — being exposed," warned Verena Ross, the chief of the EU’s securities regulator, in an exclusive interview with POLITICO.

It's not difficult to see what might happen, and how. So far a series of mini-crises — relatively small and self-contained — means there's a clear and ominous playbook for how a problem in shadow banking starts, and then spreads:

— The prime example is the turmoil that hit U.K. pension funds in the fall, with the Bank of England having to step in to buy bonds to calm markets.

— Similarly, volatile price swings in futures markets sparked by Russia’s invasion of Ukraine created a cash crunch at European energy companies.

— At the start of the pandemic, a “dash for cash” by companies created problems in short-term debt markets — again requiring a central bank intervention.

— And in 2021, the collapse of the Archegos hedge fund spread losses on large hidden bets to banks.

The same themes run through all those wobbles: short-term cash pressures, risky bets and domino effects.


Further risks


“What you see in all these [peripheral] episodes is that there’s a common issue around … liquidity, leverage and interconnectedness," Ross said. And these are "common indicators of issues that we need to look at, to identify where potential further risks might be coming from."

It's not just the securities regulator. Other watchdogs are sounding similar warnings about how shadow banks could accentuate a crisis.

A change in financial market conditions could lead to short-term cash stress and trigger forced selling, Jérôme Reboul, managing director of the regulatory policy and international affairs directorate at the French Autorité des Marchés Financiers (AMF), said.

That could create a “self-reinforcing mechanism” where selling drives prices down further, creating more pressure on investors — or more cash demands through margin calls on derivatives positions. “That’s the episode that everybody has in mind,” he said.

But while almost everyone agrees the shadow banking sector might be an accident waiting to happen, there isn't a clear or agreed plan for how to stop it.


What to do


Global authorities want to make shadow banks more resilient to prevent a cash crunch mutating into a full-blown crisis. Central bankers are pushing for action because they might otherwise have to pump in public money to calm things down — at a time when they’re eager to do the opposite: step back from markets.

There’s a divide over how far to go. While central banks want to transfer similar safeguards already in existence in the banking system — such as cash buffers — over to the shadow banking sector, markets regulators prefer more bespoke options.

As Ross said, it's not the case that one size fits all.

“It is to my mind not necessarily the right approach to just say because we have measure X in the banking sector or measure Y in the insurance sector, you should have the same necessarily in another sector," she said. "You need to look at what actually makes sense in the individual area and sector that you are dealing with."

Still, there is common ground over the need to firm up what tools are available in a crisis — like penalizing investors rushing to get their cash back quickly — and preferably before something else goes pop.


We're not banks


For its part, the fund industry is fiercely resistant to any reforms that would force them to hold buffers like banks, and is wary of being lumped together with other parts of the shadow bank sector.

But even it recognizes the problem.

“Do I think that there’s a risk of accidents in the nonbank sector broadly? I would say, yes, I do. Any time you have such a lengthy period of stimulative interest rates and stimulative fiscal policy, and then you come out of it, you’re going to see that,” said Michael Pedroni, chief global affairs officer at ICI, which represents the global fund industry.

In the EU, there’s a debate underway over how prescriptive to be on the tools available in a key piece of fund legislation, and to improve data and reporting to the authorities.

“We need to get our house in order in the EU,” said Ross. "On the other hand, we need to be conscious that we live in a global financial system.”

Comments

Oh ya 52 days ago
The government needs to get out of bailing shadow banks and regular banks out. If they fail let the chips land were they be.

Newsletter

Related Articles

Hong Kong News
Close
0:00
0:00
Singapore’s Prime Minister says China and US need to stabilize relations because world can't afford a confict between the two superpowers
Gordon Moore, a co-founder of Intel Corporation, died at 94
In a dramatic U-turn against His Government: Judicial Reform Legislation Must Be Halted, Says Israeli Defense Minister Yoav Gallant
Powell: Silicon Valley Bank was an 'outlier'
Bordeaux town hall set on fire in France pro democracy protest
Police violence in Paris
Paris: Some of the police are stepping down and showing solidarity with the protesters.
Donald Trump arrested – Twitter goes wild with doctored pictures
NYPD is setting up barricades outside Manhattan Criminal Court ahead of Trump arrest.
Credit Suisse's Scandalous History Resulted in an Obvious Collapse - It's time for regulators who fail to do their job to be held accountable and serve as an example by being behind bars.
Goldman Sachs cuts outlook for European bank debt over Credit Suisse crisis
Paris Rioting vs Macron anti democratic law
'Sexual Fantasy' Assignment At US School Outrages Parents
The US government has charged Chinese businessman Guo Wengui with leading a $1 billion fraud scheme that cheated thousands of followers out of their money.
Credit Suisse to borrow $54 billion from Swiss central bank
The BBC problem about China
Russian Hackers Preparing New Cyber Assault Against Ukraine
"Will Fly Wherever International Law Allows": US Warns Russia After Drone Incident
If this was in Tehran, Moscow or Hong Kong
Announcing GPT-4
TRUMP: "Standing before you today, I am the only candidate who can make this promise: I will prevent World War III."
China is calling out the US, UK, and Australia on their submarine pact, claiming they are going further down a dangerous road
A brief banking situation report
We are witnessing widespread bank fails and the president just gave a 5 min speech then walked off camera.
Donald Trump's asked by Tucker Carlson question on if the U.S. should support regime change in Russia?.
'No relation to the American SVB': India's SVC Bank acts to calm depositors amid brand name confusion.
Good news: The U.S. government is now guaranteeing all deposits, held by, Silicon Valley Bank, and the funds are available as of today
Silicon Valley Bank exec was Lehman Brothers CFO
In a potential last-ditch effort, HSBC is considering a rescue deal to save Silicon Valley Bank UK from insolvency
Saudi Arabia has announced a major breakthrough in diplomacy with Iran after two years of intense talks
Elon Musk Is Planning To Build A Town In Texas For His Employees
The Silicon Valley Bank’s collapse effect is spreading around the world, affecting startup companies across the globe
City officials in Berlin announced on Thursday that all swimmers at public pools will soon be allowed to swim topless
Fitness scam
Market Chaos as USDC Loses Peg to USD after $3.3 Billion Reserves Held by Silicon Valley Bank Closed.
A primitive judge in Australia sparked outrage when he told a breastfeeding woman to leave his courtroom for being “a distraction"
Barcelona is feeling the heat as they face corruption charges over payments to former vice-president of Spain's referees' committee, Jose Maria Enriquez Negreira
Banking regulators close SVB, the largest bank failure since the financial crisis
Silicon Valley Bank: Struggles Threaten Tech Startup Ecosystem"
The unelected UK Prime Minister Rishi Sunak, an immigrant himself, defends new controversial crackdown on illegal migration
Old clip of Bill Gates saying Ukraine is a big, fat, corrupt sinkhole is going viral
Man’s penis amputated by mistake after he’s wrongly diagnosed with a tumour
2 universities in Hong Kong embrace use of ChatGPT, other AI tools
In a major snub to Downing Street's Silicon Valley dreams, UK chip giant Arm has dealt a serious blow to the government's economic strategy by opting for a US listing
Missing Chinese banker was working to set up Singapore family office
Hong Kong ditches Covid mask mandate after 945 days
Xi Jinping and His Wife Meet with Cambodian King Norodom Sihamoni and Queen Mother Norodom Monineath Sihanouk
How do stolen goods end up on Amazon, eBay and Facebook Marketplace?
It's the question on everyone's lips: could a four-day workweek be the future of employment?
Is Gold the Ultimate Safe Haven Asset in Times of Uncertainty?
×