The Global Economy in Turbulent Times

CHAPTER 84 Shadow Banking: The Global Bogeyman¹

The lure of shadow banking is ever present. Governor Mark Carney, Bank of England, points to shadow banking in emerging markets as the greatest danger to the world economy.² That’s serious. Indeed, I receive regular requests to unravel this phenomenon and why it creates such an all-round “con-attitude” every time the concept surfaces. Why did it evolve? How large and pervasive is it? Will it lead to instability and precipitate a systemic crisis? One thing is certain: Its operations are not necessarily shadowy; it’s global, it’s huge, it’s fast-moving, it’s popular, but it’s poorly understood. It can be a powerful tool for good, but if badly managed, it can be explosive. Following are some definitions to clear the air.

• Shadow banking—defined by the Financial Stability Board (FSB) (the United Kingdom’s watchdog to preempt financial crises) as “lending by institutions other than banks.”³ In most countries, banks are the only authorized depository of savings with last-resort support by the central bank to stabilize the impact of their lending. In return, they are subject to lots of restrictive rules and regulations. But monies can and do bypass the banks from savers directly to investors. Viewed broadly, shadow banking includes any bank-like activity undertaken but not regulated, including via mobile payment systems by, for example, Vodafone or Alibaba’s Alipay; technology-based bond-trading platforms; investment products sold by ...