She is responsible for the financial conflagration of 2007 whose effects are still felt today. Yet ten years later she is thriving. She is the finance shadow, parallel financing, also known as the shadow banking. The latest study of the Financial Stability Board (CFS), published mid-May, paints a frightening picture of the financial world that thrives immune to banking regulations. In 2015, finance shadow weighed 92,000 billion according to the CFS (150% of world GDP). Never seen. “She continues its upward trend for the seventh consecutive year with 3,800 billion more in 2015”, experts of the organization mandated by the G20 since 2009 to monitor the financial world.
In mid-November 2008, the greatest political leaders of the world have agreed to meet in Washington the time of a G20. Never short on statements, they engage in a “never again”. The myth of benevolent funds able to regulate itself seems to count his days. Because this belief was shattered on the thousands of billions swallowed up by states to save the banks, fight the recession, the risk of flying (as was the case), the level of public debt and its corollary of austerity policies to redress the public accounts bar. Never socialization of losses will be as was the perfect reflection of the privatization of profits.
Admittedly, since the banking system is subject to rules, prudential say, more binding. Prescriptions from “Basel III”, a set of international standards issued after the crisis by the Basel Committee, the forum that brings together the major central banks of the world. Rules that aim in particular to require banks to have more capital when they lend money to individuals or companies. History better copes with any losses caused by the non-recovery of these loans, without having to call the taxpayer in insolvency lenders.
But ten years later, the shadow finance continues to threaten global financial stability. With 30,000 billion exchanged in 2015, the virtuosos of shadow banking are European. The United States (26,000 billion) they followed suit, followed by the United Kingdom. As for China almighty, the black box of finance, loans and other financial transactions off the radar will reach 8000 billion.
Mapping of finance from the shadows only lists 28 countries, representing 80% of global GDP. Something new: the jurisdiction of the Cayman Islands for the first time reported its figures. His shadow banking (6000 billion dollars) reveals it more important that Canada and Japan (4000 billion). The assets of this tax hideout represent 170 000% of GDP! Who says better? No one, even if it is difficult for many to mention world record. By opaque nature of this finance is indeed inadequately surveyed. Luxembourg, home of the president of the European Commission, Jean-Claude Juncker, has refused to participate in the work of the FSB. With impunity, since nothing obliges a state to show their credentials. Meanwhile, are brewed in the financial system “parallel”, which poses risks for stability because of its entanglement with the traditional banking system, reaching 34,000 billion.
To better grasp this set of players in finance from the shadows, located at the borders of banks and financial markets, a reminder is needed. Usually, the “traditional” banks finance loans with the resources they collect from their depositors and their own funds. Banks are therefore what specialists call a “maturity transformation”. The loans they grant are performed at longer maturities than their resources. The banking system, therefore, holds that the stability of the confidence of depositors. If they suddenly panic, decide in large numbers to withdraw their savings, while the banking system collapses. It is precise to ensure the confidence of depositors and the stability of the banking system of rules and institutions have been established in most countries (deposit insurance, central banks as lenders of last resort or prudential supervision).
Conversely, shadow banking brings together a diverse set of non-banking institutions thus escapes the rules of the sector. And, while they carry out credit and processing activities comparable to those of the banks. “The player’s shadow banking, therefore, have no direct access to insured deposits or refinancing of central banks, “says Laurence Scialom, an economics professor at the University of Paris-X. And are therefore potentially more vulnerable to the slightest shock.
Yet, many people involved in this parallel finance: investment banks, hedge funds (hedge funds) or investment funds (mutual funds, pension funds, insurance companies).
“While it is undeniable that there is now a wide regulation of banks more restrictive than it was before the crisis. The trouble is that this regulation is too compartmentalized. And she has not cut the link between banks and the world of “shadow bankers”, “analyzes Jean-Michel Naulot, a former banker and former regulator with AMF (AMF). Subject to the double pressure of ever stronger shareholder returns and bank supervision standards requirements, banks continue indeed to seek to increase and diversify their financing offer. To meet prudential requirements, in particular, the ratio of equity (capital reserve with respect to loans), so they go out of their balance sheets some of the riskier loans.
It is this strategy that led them to a famous massive use of derivatives and financial techniques such as securitization of receivables. “The bank provides loans and sells them immediately to other financial operators such as hedge funds, management companies, pension funds, said Francois Morin, emeritus professor of economics at the University of Toulouse-I. Thus bank loans are converted into marketable securities in the financial markets. “At the other end of the financial chain is the set of parallel financial players (pension funds, hedge funds …) that managed to collect savings in search of juicy investments and who are willing to take the risk of buying structured products. There is, therefore, a permeability between regulated banks and shadow banking.
By itself, the Chinese example speaks volumes about the risks posed by 8000 billion brewed by finance from the shadows to the entire economy. With low yields on the side of the banks, more and more Chinese companies, local authorities entrust a portion of their cash in hedge funds that invest in the financial markets, in real estate transactions or grant more credits easily than would the regulated banking system. No financial risk control constraint of the borrower, no guarantee funds, no support from the central bank in case of default. Worse, lenders often unaware of how their project is associated investment.
Just like what happened in the United States before the subprime crisis, the banking sector of China’s shadow, growing (+ 31% last year) outsources the risk to the financial markets. They then sell the loan to third parties (local authorities, private individuals, companies …) that will affect the high interest, compared to conventional investments.
Under the influence of euphoria financial returns much higher than those offered by private deposits with the classic Chinese banking system, the financial players from the shadows just forget that these investments are absolutely not guaranteed. A financial accident occurs in this shadow world and is general panic.
We know the result of this irrational exuberance: in imitation of movement, everyone will want to recover his initial bet, convinced that the first come first served. Given this risk of general collapse, hedge funds will be unable to cope with withdrawal requests of local communities or individuals. Distrust will settle, and the contagion will spread. The crisis rotten loans will turn into a crisis of liquidity – banks refusing to lend to each other. And a new financial, economic and social crisis.