PanamaTimes

Tuesday, Apr 16, 2024

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 1 year 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

PanamaTimes
0:00
0:00
Close
Apple warns against drying iPhones with rice
In a recent High Court hearing, the U.S. argued that Julian Assange endangered lives by releasing classified information.
Global Law Enforcement Dismantles Lockbit Ransomware Operation
Russian opposition leader Alexey Navalny has died at the Arctic prison colony
The President of Argentina Javier Mile does not fly private, he flies commercial, with the citizens he represents. And they LOVE him for it.
Bitcoin Reaches $50,000 for First Time in Over Two Years
Belo Horizonte: Brazil's Rising Carnival Hotspot for 2024
In El Salvador, the 'Trump of Latin America' stuns the world with a speech slamming woke policing after winning a landslide election
Tucker’s interview with Putin is over 50M views on X within the first 5 hours.
Finnish Airline, Finnair, is voluntarily weighing passengers to better estimate flight cargo weight
President Nayib Bukele has proudly announced El Salvador's remarkable achievement of becoming the safest nation in the Western Hemisphere.
Former Chilean President Sebastian Piñera Dies in Helicopter Crash
This farmer seems to understand science a bit more than the event organizer, Klaus Schwab.
Facebook turns 20: From Mark Zuckerberg's dormitory to a $1trn company
The Coolest Dictator in the World" on the Path to Victory in El Salvador
Macron, France and fake news
Indian-Origin Man 'King' Arrested For Smuggling $16 Million Drugs Into US
Can someone teach Americans that not every person with slanted eyes is Chinese?
Europe's Farmers Feeding the People, Protesting Against Politicians Who Do Nothing for Their Country and Serve Only Themselves at Taxpayers' Expense
Paris Restaurant That Inspired 'Ratatouille' Loses $1.6 Million Worth Of Wine
Brazilian Police Investigate Bolsonaro's Son for Alleged Illegal Spying
Police in Brazil Raid Residence of Bolsonaro Associate Over Allegations of Illegal Spying
Border Dispute Escalates as Texas Governor Vows Increased Razor Wire
OpenAI Enhances ChatGPT-4 Model, Potentially Addressing AI "Laziness" Issue
The NSA finally acknowledges spying on Americans by acquiring sensitive data
Report Reveals Toxic Telegram Group Generating X-Rated AI-Generated Fake Images of Taylor Swift
US Border Patrol States 'No Plans' to Remove Razor Wire Installed in Texas
Bitcoin Experiences Approximately 20% Decline in Value
Klaus Schwab recently appointed himself as the Earth's "trustee of the future."
DeSantis Drops Out, Endorses Trump.
Nikki Haley said former President Trump is "just not at the same level" of mental fitness as he was while president in 2016.
Residents of a southern Mexican town set the government palace on fire in response to the police killing of a young man
Samsung Launches AI-Driven Galaxy S24, Ushering in New Smartphone Era
Judge Questions SEC's Regulatory Overreach in Coinbase Lawsuit
The Ecuador prosecutor who was investigating the television studio attack, has been assassinated.
Is artificial intelligence the solution to cyber security threats?
Vivek Ramaswamy suspends his US election campaign and endorses Trump.
Viral Satire: A Staged Satirical Clip Mistaken as Real Footage from the 2024 World Economic Forum in Davos
The AI Revolution in the Workforce: CEOs at Davos Predict Major Job Cuts in 2024
Ecuador Reports 178 Hostages in Prison Gang Standoff
The Startling Cuban Espionage Case That Has Rattled the US Government
Two Armed Men in Ecuador, Dressed as Batman and The Joker Storm the Streets.
Armed Gang Raids Ecuadorian TV Station Following State of Emergency Declaration
Anti-Democratic Canada: Journalist Arrested for Questioning Canadian Finance Minister on Support of Terrorist Group
Ecuador's 'Most-Wanted' Criminal Vanishes from Prison
Mexican Cartel Supplied Wi-Fi to Locals Under Threat of Fatal Consequences for Non-Compliance
Border Surge Leads to Over 11,000 Migrants Waiting in Northern Mexico
Outsider Candidates Triumph in Latin American Elections
As Argentina Goes to the Polls, Will the Proposal to Replace the Peso with the Dollar Secure Votes?
Fatal Shark Attack Claims Life of Boston Woman Paddleboarding Near Bahamas Resort, According to Police
×