The 2008 collapse of Lehman Brothers was the beginning of the banking crisis. For those close to it, problems have lurked beneath the surface of the financial world for a while. The secondary banking crisis and the insolvency of subprime mortgage both have the effect of warning of earthquakes for the next “big one”. However, even then, no one really could appreciate the depth of the disaster.
Other banks are backed by shareholders or more strongly governments bailout them when they are on the brink of collapse. For those of us who watch, there is a fear of how far this can go and the dangers of how well infecting bad money poisoned. There was also a feeling that it was just a dessert for the arrogant and excessively financed fake aristocrats who ruled it over their apparent territories. These people not only pay for themselves incredible sums of money, but then courageously turn to their citizens, through their government, to bail them, with little or no pain for themselves. – almost any degree. Taxpayers, ordinary shareholders and the larger economy burdened by this must feel real pain.
In fact, in Lehman’s day, there was a clear feeling that of all investment creatures this particularly fragile creature could afford to give up. However, few of us at the time (although many changed their tune later due to rewriting history,) really appreciated how the Lehman tentacles were in fact more cunning. far more than its competitors and thus its demise caused a much bigger failure than was originally expected.
Since then, when we hear it regularly, we (industry and regulators) have learned from this and understand how to prevent such disasters from happening again. The trouble is that the next insanity is not the same as the last, and so learning from your mistakes in the past does not save you from future failures. Industry, regulators and politicians will now have to take a broader view to understand the risks and not only be comfortable understanding one single aspect of it, but must appreciate how the Different elements work together. This is not simply because overall operations and settings have changed dramatically as often as technology is staggering, but are also inevitable from pandemic effects.
The problem today is not just banking, be it commerce or investment, but something more elusive – and that is the world of “shadow banking”. Shadow banking, in essence, is the provision of financial services but not through the usual banking and corporations. This may not seem like such an issue until you consider issues like regulation, compliance, and risk management. In fact, you now have new animals in the wild savannas, but the ones you didn’t realize before can be dangerous. Absolutely right, I would be wary of lions but wouldn’t expect an unpleasant gnaw from a wildebeest.
So what shapes are these dark creatures and how can we recognize them? Basically, we have to look at what they do rather than what they claim. Recently in the UK, we had a scandal about a company called Greensills that has been growing at an extraordinary rate, offering what many would appreciate as a new form of finance and improved cash flow – probably. Definitely a great choice for businesses that control their cash. They would call it “supply chain financing,” which in plain English is factoring or bill discount, a service as old as a business, but a service that is often carefully managed under suppliers. The level is usually the bank. The history of this service goes back to the days of the medieval crusades, which would financially support those who would be crusaders in their perilous adventures in the Levant.
In this case, the company provided invoice discount funding but then went one step further by discounting even future invoices (i.e. those that did not exist) and then giving they were in bonds that could then be sold by real banks (in this case Credit Suisse and others) brought it back to mainstream finance, and could eventually become an investment. “Safe” bonds to our super fund! This gave them a respectable look. As a result, these funds will inevitably be endorsed by larger, well-managed and clearly accountable organizations.
These are usually traditional financial institutions but are provided by a new generation of companies based on new technology. Amazon and Google will often engage in mass types of financial transactions, but are they banks now or should we still call them “tech companies”? In my opinion, these are transactional businesses that use technology for their own benefit, not just pure technology businesses.
Across Europe, such companies may offer investment funds and money market funds, and include other financial intermediaries, such as rental and payment service corporations. or hire purchase. This is a simplified broad definition of shadow banking. In terms of its size, in 2018, shadow banking assets in the euro zone amounted to almost 34.5 trillion euros, accounting for more than 40% of the entire financial sector.
All we should do now, regardless of our professional lives, is to look at what our business partners are actually doing rather than what they prefer to set themselves up. The old phrase is, “if it walks like a duck and makes sounds like a duck – then it can be a duck”. However, we should rewrite that to say, “if it looks like an ugly duckling, then it could be an ugly duckling” – and not likely to grow into a white swan. tomorrow.