Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Shadow Banking: The Next Financial Crisis Landmine

Stock-Markets / Credit Crisis 2012 Nov 26, 2012 - 03:03 AM GMT

By: Alasdair_Macleod

Stock-Markets

The Federal Reserve Board originally led us to believe that it was necessary to expand money supply through quantitative easing to offset the contraction of bank credit. Bank credit is no longer contracting, and indeed was already expanding when QE3 was introduced. This objective is now being satisfied as illustrated in the chart below:



Perhaps helping to drive this trend is a fall in the general level of charge-off and delinquency rates to less than 1.5% of all loans and leases, down from the crisis levels of twice that. According to an article at Bloomberg dated August 6, “…. households have cut debt since the 2008-09 crisis, while banks have increased liquidity and bolstered capital buffers”. So the up-coming fiscal cliff permitting, conditions are in place for a further expansion of bank credit and we can put the past behind us.

Well, not quite.

As well as conventional bank lending, there is also shadow banking to consider. The Global Shadow Banking Monitoring Report 2012 tells us that at $23 trillion for the US alone, it dwarfs reported bank lending. According to Exhibit 3-3, before the banking crisis, shadow banking in the US was growing at a compounded annual rate of over 10%, and subsequently has contracted slightly. But this probably masks a more recent pick-up in the growth rate in line with on-balance sheet bank lending, and we must also take into account the far greater growth in shadow banking in non-US financial centres, particularly in the UK, Hong Kong, Singapore and Switzerland, where restrictions on re-hypothecation are often less onerous.

The problem with this elephant-in-the-room is that shadow banking requires no bank capital to back it, because it works on collateral pledged by non-bank institutions and the general public. It is comprised principally of securitised consumer property loans and mortgages, as well as sovereign debt. And because the global financial system is fully integrated, the $22 trillion equivalent that is the eurozone’s exposure to shadow banking must also be seen as a significant risk: no wonder the European Central Bank has signalled it will save the eurozone in its entirety, at all costs. This is also interest rate sensitive stuff, and with no capital buffers to absorb losses it will not take much of a rise in rates to trigger a crisis, even without an external shock.

Now consider what happens if interest rates are forced upwards by the economic recovery, clearly signalled by the bank lending statistics in the chart above. The value of this collateral will fall, and anything more than a modest interest rate increase will risk collapsing the entire financial system. The Fed, along with the other central banks is effectively trapped: it can no longer manage the money supply in accordance with its mandated objectives. It is now the Fed’s primary function to worry about shadow banking, over which it has no direct control, other than to make sure sufficient collateral of good quality continues to be available.

There is a worrying complacency in financial circles about this problem, which suggests that financial assets are not discounting the serious risk of systemic failure. This problem demands serious attention.

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2012 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in