Shadow banks are not outside the banking system

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Good morning. Yesterday, the ADP’s special salary report fell with Splat, and a Loss of 32,000 jobs. There are always complaints about the reliability of ADP numbers, but difficult luck: until the end of the government closing, there will be no reports of salary statements from the work statistics office. Readers who have advice on writing a financing column in the absence of official economic statistics must contact: United.com.

Shadow second banks

Earlier this week without severity Indicate This, in the United States, bank lending for non-banking financial companies-“shadow of banks”- everyone From growth in bank lending this year. At 1.7 trillion dollars, the Linding Shadow Bank is now about 13 percent of all American banking lending, and a much higher percentage of those in the largest banks.

How anxious we should be concerned about the spread of land lending from banks to shadow banks (known, in terminology, such as ndfis: “non -depressing financial institutions”)?

When the bank provides credit for NDFI instead of business or consumer, it moves from direct lending to indirect lending. The bank may lend to the private capital fund, not to companies; The bridge financing may provide a credit manager to cushion the city’s receivables, instead of lending directly to consumers; Or it may provide major broker financing for the hedge fund, instead of engaging in the trading of ownership itself. and so on.

With indirect lending, three things of the bank and the banking system may leave: risks, return and capital. Ideally, the three leave in a percentage. When a special credit fund mediates in lending, it takes some risks – the fund’s investors are in line with the first losses on the loans. The fund earns some profits in exchange for these risks, in addition to what it pays to the bank to finance. And the bank, because it risk less, can carry less capital than it would have happened directly.

Problems arise when the conversion does not fit – when the risks remain, for example, but profit and (special) the capital leakage anyway.

In the NDFI lending mutation, does it risk staying in the banking system, while revenue and capital leave? From the outside, it is extremely difficult to know that.

NDFI loan disclosure in the weekCall reports“Required by the organizers does not tell you much about the economic exposure to banks. Banks must report NDFI lending into five sub -categories. Here is how NDFi loans out of the category starting from the end of the second quarter, for banks that exceed $ 10 billion in assets:

This is good as it goes. But this is not too far: unlike mortgage credit, to what extent do these classifications tell you about what kind of basic assets that the bank is exposed to when he gives NDFI? Are you exposed to commercial real estate? SubPRIME Auto? Funding the supply chain?

For example, a large regional bank, for example, holds $ 62 billion in NDFI loans – about five loan book. Ninety -five percent of that is “business”, “private stocks” and “others”. Knowing that, are you more wise about what NDFI exposes to the bank, in the end? Not much, and do not look at the bank’s quarterly disclosure for help. 10 -q reports do not mention NDFI lending. The bank’s supervisors can see individual loans, of course. Only investors should hope that the organizers will be at the top of things.

After that, the exposure of banks to NDFis will vary depending on the state of the economy, individual industries and certain creditors. This is partially due to the way banks and NDFis operate in a sympathy, as Acharya viral, Nicolas Citorelli, and Bruce Tokman argued in an excellent way. paper last year. They explain that although NDFis can do a lot of things that banks do, they cannot compare banks as warehouses for liquidity, because they cannot take deposits and have no access to the official background of liquidity. So NDFis acquires “liquidity secure”, usually in the form of credit lines with banks. These lines are the “secret ropes” that link NDFis to banks, and Acharya has placed that it is not available.

In moments of tension, these credit lines are drawn, banks are exposed to NDFis and which of them lend to height. In fact, you can see a small example of this in the first scheme above, in small loans in NDFI loans in 2020. In the first days of Covid-19, NDFis equals credit lines with banks, to get only on hand. The special anxiety in such cases is what bankers call “wrong risks.” For example, the mortgage lender is likely to rely on the bank credit line at a moment when the value of credit loans under the mortgage under severe pressure. Consequently, the bank’s exposure to a mortgage lender increases, just as guaranteed loans become less valuable.

How much variable exposure to bank shades now owns the banking system, given the rapid growth of NDFI lending? How risks of the wrong road there? I don’t know, and I am not sure anyone else he is doing either.

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