27 January 2015

The New Risk: Shadow Banking

Over the last couple of years CelticGold.eu has posted many articles that focus on the systemic risks that exist in the global financial system. Most of the attention is paid to the too-big-to-fail banks and their collective exposure to complex derivatives. Much less attention has been directed toward shadow banking, which may pose just as big of a risk as the derivative exposure by the big banks. 

Shadow banking is generally referred to non-banking companies that provide similar services that are offered by traditional commercial banks. The reason shadow banking is considered a risk to the financial system is that the lending provided by these companies is sometimes not subject to the same regulations of commercial banks. Therefore, lending activity is more difficult to track.

Where are the Risks?

According to an article in the telegraph, the IMF estimates that contingent liabilities of these shadow forms of lending have reached $15 trillion in the US. (Source: telegraph.co.uk 01/21/2015) In the article, Zhu Min, the IMF's deputy chief, said "The key risk has shifted to shadow banking.”

However, shadow banking is not just done in the US. It appears to exist on most other continents. Britain’s shadow banking sector is more than twice the size of any other economy’s as a share of GDP, according to the IMF. (Source: The Guardian 10/01/2014) 

In the article, shadow banking in China accounted for an estimated 35-55% of GDP and was expanding at twice the rate of bank credit. The article speculates that shadow banking is expected to grow because of tighter bank regulations and low interest rates.

Global Financial System is Inter-Connected 

While it is very difficult to predict where the next crisis area will be in the global financial system, shadow banking is yet another risk that is hard to quantify. We learned from the 2008 financial crisis that it only takes the failure of one or two major firms to set off a chain reaction around the world.

Limiting one’s exposure to the major banks and holding some assets in physical Gold and Silver is a good first step to developing your own risk management strategy. While some sort of financial crisis may not be imminent, being ahead of game is much better than being too late.

Author: celticgold.eu

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