But, 16 years (after the 2008 crisis), some experts believe new risks are
emerging. And this time, they are linked to highly indebted companies backed by
private equity firms, which are part of the growing but opaque portion of the
financial system known as the shadow banking sector. Shadow banking refers to
financial firms that face little to no regulation compared with traditional
lenders, and includes businesses such as hedge funds, private credit and private
equity funds. While the use of securitisation dipped in the wake of the 2008
financial crisis, as a result of a tarnished reputation and regulatory backlash,
its popularity has subsequently risen. Today, the global securitisation market
covers about £4.7tn of assets, according to estimates by analysts at RBC
Capital. In this public market, bundled loans are rated by credit rating
agencies and sold on to a broad range of investors, and their terms, structure
and sales are openly disclosed. These are the routes typically taken by
traditional banks, which face far more stringent regulation. The remaining
£120bn is made up of securitised loans bundled up by the shadow banking sector.
Private securities are sold directly to a limited pool of sophisticated
investors. They are less regulated, need not be reviewed by ratings agencies,
and are far more opaque.
Crosspost worldnews:
The shadow banking sector is trying its hand at trading in debt-based products such as collateralised loan obligations
They are not back, they have never been away. And it’s not just the hedge funds but also the regulated banks that gamble with such risks (although the former hold much more assets).
According to financial data at the [U.S.] Federal Financial Institutions Examination Council (FFIEC), as of December 31, 2023, JPMorgan Chase held $3.227 trillion off-balance sheet, of which $528.5 billion is undefined and marked as “other.” To put that in perspective, $528.5 billion is the size of the assets of the seventh largest bank in the United States and yet the public has no idea what the $528.5 billion off-balance sheet at JPMorgan Chase is made up of or what kind of risks it presents.
The article also deals with possible solutions. One major issue would be to prohibit deposit-taking banks from merging with investment banks, a measure that has been introduced in the U.S. as a response to the Great Depression in the 1930s and was ditched in the 1990s. The U.S. must urgently reintroduce such a law, and Europe and the rest of the world must follow.
They are not back, they have never been away. And it’s not just the hedge funds but also the regulated banks that gamble with such risks (although the former hold much more assets).
There is a good analysis from May 2024. Among others, it says:
The article also deals with possible solutions. One major issue would be to prohibit deposit-taking banks from merging with investment banks, a measure that has been introduced in the U.S. as a response to the Great Depression in the 1930s and was ditched in the 1990s. The U.S. must urgently reintroduce such a law, and Europe and the rest of the world must follow.