The interconnectedness of banks and shadow banks is more complex and riskier than it appears. This is evident with prime brokerage activities, which are services that banks provide to hedge funds and other non-bank entities, including custody, clearing, securities lending, financing and reporting. Prime brokers can also provide leverage via cash financing or securities financing transactions.
The prime brokerage industry is heavily concentrated, with the top 10 prime brokers serving the largest proportion of hedge funds globally, according to a S&P Global Ratings report. In France, two prime brokers account for 82 per cent of brokers’ total gross notional exposures to non-bank entities.
