What is Shadow Banking and why does it exist? – CryptoMode

Most cryptocurrency enthusiasts want to know more about the financial industry. However, a crucial concept that is often overlooked is shadow banking. This is a very real system and makes the printing of money through traditional banking services look like currency.

An overview of shadow banking

Financial institutions come in many different shapes, forms and sizes. Although it seems that most of them have to adhere to strict regulations, this is not necessarily the case. Non-traditional institutions do not accept traditional deposits, bypassing regulatory bureaucracy as it does not apply to them. It may seem odd to let such providers exist unregulated, yet it is an absolute necessity in the financial industry. Moreover, one wonders why governments insist on regulating Bitcoin when they don’t even do so for shadow banking institutions.

Shadow banking service providers are innovators in financial markets. The term “shadow” has a negative connotation – and for good reason, as we’ll explain later, but it does have some advantages. The lack of regulatory control leaves some leeway for these institutions to fund loans. For example, these providers do not need to build up capital and cash reserves.

One of the advantages of lack of supervision is to pursue greater risks without too much inconvenience. This applies to credit, liquidity and overall market risk. By extension, it is these institutions that have helped fuel the subprime mortgage and loan securitization markets through their nillie lending activities. We all know it ended with the 2008 financial crisis, bringing shadow banking institutions into the spotlight and how they extended credit and systemic risk.

How big is this industry?

Unfortunately, there is no straight answer to this question. Shadow banking encompasses all non-banking financial institutions that are not subject to regulatory control. Since no one regulates these providers, it’s almost impossible to tell how many of them exist today. Institutions range from money market funds, investment banks, hedge funds, payday lenders, and insurance companies, among others.

One would expect the increased surveillance since 2008 to have a significant impact. It is not the case at all. Instead, it has facilitated even more immeasurable growth in this industry. One estimate, presented in a 2018 Financial Stability Board report, recorded $92 trillion in assets in 2015. Additionally, shadow banking assets with financial stability risks reached $34 trillion. Keep in mind that none of these findings include data from China for rather obvious reasons.

A widespread aspect of side cooking is the use of secured loans and repurchase agreements. These vehicles facilitate short-term loans between actors in this shadow world. Additionally, non-bank qualified lenders account for a large share of mortgage lending in various countries, including the United States. Peer-to-peer lending – not the decentralized finance version – is another crucial vertical.

Keeping a Lid on Shadow Banking

We can think that new players are strongly encouraged to enter the shadow banking field. After all, there are no regulations and very few restrictions. Additionally, the growth of the industry is keeping economies afloat in most parts of the world today. Decoupling shadow banking from traditional finance is not advisable, despite the systemic risk it poses. However, this is the – only? – viable solution in centralized finance to meet the growing demand for credit.

Even the 2010 Dodd-Frank reform did little to put an end to this dark side of the financial industry. Policymakers primarily drafted the reform to address bad behavior in the regulated banking sector. Although it had some minor consequences for non-banking financial institutions, it did not dampen growth in any way. To date, there is still a huge lack of oversight regarding shadow banking. Unfortunately, it looks like it will stay that way, further increasing systemic risk for everyone.

Chinese authorities have taken a slightly tougher stance on non-banks since 2017. A crackdown on risky financial products and services is a step in the right direction. However, the hidden side of banking is a vast industry that spreads its tentacles in all directions. Eliminating it entirely will prove detrimental to the economic prospects of any country. In essence, shadow banking is too big to fail, which is not necessarily a good prospect.

Looking to advertise? We will be happy to help you publicize your project, your company or your service. CryptoMode produces high quality content for cryptocurrency companies. To date, we’ve provided brand visibility for dozens of companies, and you can be one of them. All our customers appreciate our value for money ratio. Contact us if you have any questions: [email protected]

Comments are closed.