May 2015        

The rise of shadow banking

Nicola Lawlor

Both the EU Central Bank and the International Monetary Fund published reports recently on the growth and risk of the shadow-banking sector.
     While estimating the size of the sector and identifying some immediate risks, both reports fail to identify the rise of finance, and in particular non-bank credit-creating entities, over recent decades as a systemic aspect of monopolisation, stagnation, and over-accumulation.
     Both reports also promote the “positive” aspects of shadow banking and see it having a role in releasing credit where other financial institutions might not venture. As the IMF put it, “the challenge for policy-makers is to maximise the benefits of shadow banking.”
     The IMF defines shadow banking as credit intermediation outside the conventional banking system—or non-bank entities that create credit. This is a broad definition, making shadow banking about a quarter of total financial intermediation. It therefore includes pension funds, insurance entities, hedge funds, structured investment vehicles, mortgage services rights (collectors of interest and debt), and derivative product companies, which are often special-purpose vehicles.
     The Financial Stability Board has been monitoring shadow banking since 2011 and has reported that the United States, Britain and the euro area have the largest shadow-banking systems. Britain’s accounts for more than 360 per cent of GDP, while those of the United States and the euro area are closer to 200 per cent.
     But Ireland (also included in the euro area) stands out. The shadow-banking system here has been estimated to be in the region of €1.7 trillion—almost 11 times our GNP. This is without doubt related to global tax evasion and the fact that many corporations pay less than 1 per cent tax, never mind the official rate of 12½ per cent.
     The growth of the shadow-banking system has created new risks and instabilities within the system, but it has also provided a much-need avenue for investment. Its importance as an avenue for investment far exceeds the risks it creates with regard to the reproduction of capital, and so there have been few serious attempts to control, isolate or regulate the sector. In fact the IMF makes it clear that, as regulation has increased in the normal banking industry, shadow banking has grown, as if to imply that regulation is futile and that shadow banking should be embraced and normalised.
     Seven years after the crisis erupted, the crucial role played by finance, financial products and investment avenues is obvious. There will be no serious attempt to control capital merely to mitigate its worst instabilities by establishing publicly funded bail-out mechanisms or to increase the confidence of investors in finance. This is monopoly capitalism in the twenty-first century.

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