- “Shadow Banking” is now $ 250 trillionOr 49 % of the financial assets in the world, according to the Financial Stability Council. The hedge funds are running 15 times more of the assets combined than they were in 2008. The last height of bond returns-which was chosen by hedge funds that benefit from trading that was severely benefited-some people who worried about this unorganized work can be a 2008 threat to the financial system.
Economist Paul McCole formulated the term “Shadow banking servicesIn 2007, more than a year before the brothers Lehman Collapse. Soon it became easy to help easy credit in fueling a sub -mortgage Collapse Which brought the global financial system to its knees. After nearly two decades, a Bond market The sale resulting from the main chaos Donald Trump Display customs tariff Fears of a similar liquidity crisis sparked.
The great recession highlighted how different institutions participate in addition to banks in lending without the same level of organizational audit applied to banks, even if they are also decisive to the health of the wider financial system. This time, however, the concentration has shifted from investment and constructive mortgage banks into hedge funds and private stock companies. For example, and An unusual height In the United States, the treasury revenue, which rises with the low price of bonds, a Lights About the benefit of batch deals with extreme benefit in maintaining the most important money markets-but it may also pose a wider threat to the economy when it collapses.
Banks, of course, the transformation of cash deposits from customers to long -term non -liquid assets such as real estate loans and other types of loans for consumers and companies. Shadow is mainly the same, but by raising money and borrowing from investors instead of using consumer deposits.
“There is nothing bad in nature. In fact, changing lending to the risk of risk outside traditional banking services can improve the elasticity of the financial system.
“This is often a lost point,” he said. luck.
Hedge boxes It can take much more risks than banks because it raises the capital from investors who often agree to “imprison” their money for a long time, which helps to isolate the company from short -term losses. As Siro noted, these investors often facilitate the discovery of prices in the markets for bonds and other securities.
One example is what is called “Trade foundation“When the hedge buys treasury bonds and selling future contract contracts associated with these bonds to take advantage of the small contradictions between them. By taking advantage of the arbitration, these companies deal with a fundamental imbalance in the credit markets that were created because mutual investment funds, pension funds, insurance companies and other asset managers require a great demand for uterine receptors.
But hedge funds must borrow severely to make the service worthy of attention, and sometimes use up to 50 to 100 times, so that debt markets can reach the short term when the trade of $ 800 billion is relaxed.
“This creates traces of ripples,” said Siro. “You always need anxiety about the effects of ripple.”
Fill in Lehman Brothers
Just because the hedge funds are not funded by consumer deposits, it does not mean that the government may not have to intervene when things go south. A decade before a controversial time Bank rescue operations In 2008, the long -term hedge fund considered the capital management “greater than failing.”
LTCM works focused on making high -borrowing stakes on arbitration opportunities in bond markets. Ultimately, he kept about 5 % of the world’s fixed -income assets, but the company took unsustainable losses when Russia She left her debts In 1998, to prevent a wider crisis, the United States government organized a $ 3.6 billion rescue package – a huge amount of the time – from the banks of Wall Street, which allowed the company to liquidate an organized manner.
“I think the exposure we are dealing with is now much greater,” said Itay Goldstein, head of the Finance Department at Warton School at the University of Pennsylvania.
Ten years later, Lehman Brothers and Bear Stearns failed, threatening to bring a lot of American banking system, as well as federal government -backed institutions such as Vi Mai and Freddy MacBelow them. None of the Investment Bank took consumers, but short -term debt markets were seized anyway. Suddenly, as followed by a widespread credit crisis, banks and companies were starvation of capital.
Besides increasing the organization and supervising the largest banks in the country, the subsequent Dodd-Frank reform legislation addressed two bank lenders.
However, the shadow sector exploded since the financial crisis. It now represents $ 250 trillion, or 49 % of the world’s financial assets, According to To the Financial Stability Council, more than twice the rate of traditional banking growth in 2023. Hedge funds, in particular, run 15 times of assets combined than they were in 2008, per Bloomberg.
the Volker basePart of Dodd-Rank, investment banks are prohibited from royal trading, and therefore, work as a market by pursuing arbitration opportunities strongly. Hedge boxes intervened to fill the void. However, their dependence on short -term debts and the relative lack of control constitute similar concerns for 2008: it is now very large, and it may be “greater than failing.”
Goldstein said: “If they explode, this will affect other parts of the financial system, including banks, then spill to the real economy,” Goldstein said.
In fact, lending to institutions such as hedge funds, private and credit stock companies, and purchase companies, paid companies are the fastest growing part of the American banking system. The loans to the banking shadow sector exceeded $ 1.2 trillion, according to a weekly benefit Data From the federal reserve. Green, who founded a hedge box, hunting George Soros, and runs the personal capital of Peter Thil, sees a clear danger of a disaster similar to the year 2008.
He said: “It is likely that it is more controlled, like not to close.”
For example, when it comes to the basic trade, stress periods on the market can leave the hedge boxes vulnerable to margin calls and other pressures to liquidate their positions. When the hedge trims are escaped from huge quantities of the cabinet, the market may fight to accommodate it. Fears can then flow on the risk of lack of liquidity Ribo marketsThe cornerstone of the short -term lending, where the American debt is the dominant form of guarantee.
This scenario was operated during the first days of the Covid-19s, which sparked the federal reserve reserve to buy $ 1.6 trillion of the treasury over a few weeks. During the last sales process, economists and other market monitors closely looked at the signs that the central bank will again need to intervene. Over the past two years, the 10 largest hedge boxes have multiplied in America more than twice their borrowing to $ 1.43 trillion, According to To the Financial Research Office.
Organizing hedge funds
Some academics say this arrangement is not perfect and they have them Proposal The Federal Reserve established a lending facility for hedge funds to address these types of crises in the treasury market. But this is a less realistic scenario if the Republicans are Congress He convinces Treasury Secretary Scott Payette to reduce the government’s ability to appoint major investment companies as a systematic, or “greater than failing.”
there Continuous differentials Siro said in organizing these types of shadow banking institutions. Their factor is like traditional banks, and prevents the discovery of prices and the effective movement of money from savers to users. But the threat of the infection is waving on the horizon, even if the companies only risk their capital.
“You cannot get it in both directions,” said Siro.
Also, the tightening of the screws will not only help the hedge boxes if it enables another type of institution to interfere in the same thing. After all, this is what happened when the hedge funds benefited from increasing the audit of investment banks.
Goldstein said: “I don’t see how this financial system makes it safe.”
While Siro worries about severe censorship, he said that the organizers need to focus on transparency in both public and private markets. For example, if the hedge boxes bear a lot of risks, it is important to know if they are associated with lenders who are transferred by the government, such as Big Wall Street Banks.
He said that if exposure to the broader system is important, measures such as capital requirements should be applied to custody custody institutions. But Siro warns of a fermentation crisis – even when it includes a very organized traditional lend Collapse to Silicon Valley Bank In 2023.
“One must be a little humble about what the organizers can capture and what the markets can hunt, and he realizes that there will () issues in both sectors,” Serro said.
Especially when it risk the complex inherent in the shade.
This story was originally shown on Fortune.com
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