The real banking system is behind the scenes and is in danger of
collapsing such is the reason we are seeing such a decline in the
economy as of late.
Keep an eye on the shadow banking system – it is about to
be shaken to the core. According to the Financial Stability Board, the
size of the global shadow banking system has reached an astounding 75
trillion dollars. It has approximately tripled in size since 2002. In
the U.S. alone, the size of the shadow banking system is approximately
24 trillion dollars. At this point, shadow banking assets in the United
States are even greater than those of conventional banks. These shadow
banks are largely unregulated, but governments around the world have
been extremely hesitant to crack down on them because these nonbank
lenders have helped fuel economic growth. But in the end, we will all
likely pay a very great price for allowing these exceedingly reckless
financial institutions to run wild.
If you are not familiar with the “shadow banking system”, the following is a pretty good definition from investing answers.com…
The shadow banking system (or shadow financial system) is a network
of financial institutions comprised of non-depository banks — e.g.,
investment banks, structured investment vehicles (SIVs), conduits, hedge
funds, non-bank financial institutions and money market funds.
How it works/Example:
Shadow banking institutions generally serve as intermediaries between
investors and borrowers, providing credit and capital for investors,
institutional investors, and corporations, and profiting from fees
and/or from the arbitrage in interest rates.
Because shadow banking institutions don’t receive traditional
deposits like a depository bank, they have escaped most regulatory
limits and laws imposed on the traditional banking system. Members are
able to operate without being subject to regulatory oversight for
unregulated activities. An example of an unregulated activity is a
credit default swap (CDS).
These institutions are extremely dangerous because they are highly
leveraged and they are behaving very recklessly. They played a major
role during the financial crisis of 2008, and even the New York Fed admits that shadow banking has “increased the fragility of the entire financial system”…
The current financial crisis has highlighted the growing
importance of the “shadow banking system,” which grew out of the
securitization of assets and the integration of banking with capital
market developments. This trend has been most pronounced in the United
States, but it has had a profound influence on the global financial
system. In a market-based financial system, banking and capital market
developments are inseparable: Funding conditions are closely tied to
fluctuations in the leverage of market-based financial intermediaries.
Growth in the balance sheets of these intermediaries provides a sense of
the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but
instead it increased the fragility of the entire financial system by
allowing banks and other intermediaries to “leverage up” by buying one
another’s securities.
Over the past decade, shadow banking has become a truly worldwide
phenomenon, and thus it is a major threat to the entire global financial
system. In China, shadow banking has been growing by leaps and bounds,
but this has the authorities deeply concerned. In fact, according to Bloomberg one top Chinese regulator has referred to shadow banking as a “Ponzi scheme”…
Their growth had caused the man who is now China’s top securities regulator to label the off-balance-sheet products a “Ponzi scheme,” because banks have to sell more each month to pay off those that are maturing.
And what happens to all Ponzi schemes eventually?
In the end, they always collapse.
And when this 75 trillion dollar Ponzi scheme collapses, the global
devastation that it will cause will be absolutely unprecedented.
Bond expert Bill Gross, who is intimately familiar with the shadow banking system, has just come out with a major warning about the lack of liquidity in the shadow banking system…
Mutual funds, hedge funds, and ETFs, are part of
the “shadow banking system” where these modern “banks” are not required
to maintain reserves or even emergency levels of cash. Since
they in effect now are the market, a rush for liquidity on the part of
the investing public, whether they be individuals in 401Ks or
institutional pension funds and insurance companies, would find the
“market” selling to itself with the Federal Reserve severely limited in
its ability to provide assistance.
As far as shadow banking is concerned, everything is just fine as long as markets just keep going up and up and up.
But once they start falling, the whole system can start falling apart very rapidly. Here is more from Bill Gross on what might cause a “run on the shadow banks” in the near future…
Long used to the inevitability of capital gains, investors and
markets have not been tested during a stretch of time when prices go
down and policymakers’ hands are tied to perform their historical
function of buyer of last resort. It’s then that liquidity will be tested.
And what might precipitate such a “run on the shadow banks”?
1) A central bank mistake leading to lower bond prices and a stronger dollar.
2) Greece, and if so, the inevitable aftermath of default/restructuring leading to additional concerns for Eurozone peripherals.
3) China – “a riddle wrapped in a mystery, inside an
enigma”. It is the “mystery meat” of economic sandwiches – you never
know what’s in there. Credit has expanded more rapidly in recent years
than any major economy in history, a sure warning sign.
4) Emerging market crisis – dollar denominated debt/overinvestment/commodity orientation – take your pick of potential culprits.
5) Geopolitical risks – too numerous to mention and too sensitive to print.
6) A butterfly’s wing – chaos theory suggests that a
small change in “non-linear systems” could result in large changes
elsewhere. Call this kooky, but in a levered financial system, small
changes can upset the status quo. Keep that butterfly net handy.
Should that moment occur, a cold rather than a hot shower may be an
investor’s reward and the view will be something less than “gorgeous”.
So what to do? Hold an appropriate amount of cash so that panic selling for you is off the table.
Source:
The 75 Trillion Dollar Shadow Banking System Is In Danger Of Collapsing
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