From a distant corner of the financial system comes another failure, hot on the heels of Wirecard’s collapse. The latest saga involves Greensill Capital, which also slipped through the regulatory net. 

What is happening?

It’s a familiar story. A world awash with liquidity, the desperate search for yield, illiquid assets, combined with a relatively new take on an old financing technique, all dressed up with some swanky technology. Greensill Capital, blessed with political patronage, grew at breakneck speed — a characteristic often suggesting excessive risk taking. Throw in another age-old sin — concentration risk — and there were all the hallmarks of spectacular failure.

Reg rage anxiety

Supervisors should have been more alert. Even more so given that hedge fund Bronte Capital had warned the Australian Prudential Regulation Authority in November of possible issues with Greensill Capital. The UK’s Financial Conduct Authority should also have been more on the ball, given the firm had a major UK presence. 

Greensill Capital was engaged in supply chain finance (SCF), a form of financial engineering. It is a type of factoring where a supplier gets up-front funding against their receivables. The twist with SCF is that it uses buyer’s credit rating (reverse factoring) — which works well if it is a rated multinational — and there is automation to greatly improve processing efficiency. It means suppliers get cheaper receivables financing, which is especially important for small firms.

For firms establishing SCF programmes, there is the extra benefit of freeing up working capital, as they can take longer to pay for their supplies. It is also classified as accounts receivables on the buyer’s balance sheet, rather than debt. 

Greensill Capital then used another not-so-new financial innovation called securitisation. It packaged up these receivables into financial products and flogged them to institutional investors desperately seeking a yield lift for a given risk on an underdeveloped asset class. Credit Suisse, for instance, transferred these products into investment funds. This has echoes of the 2007–2009 global financial crisis (GFC). 

Why is it happening? 

Credit Suisse and fund manager GAM sensibly insisted on the securitisations being insured, but Greensill remained exposed to first losses on the uninsured tranches. 

And it is when insurers became nervous about providing cover that Greensill’s business started to unravel  — one insurer refused to renew $4.6bn of cover. Credit Suisse and GAM stopped investing in the securitisations, as without insurance they became higher risk. So Credit Suisse froze $10bn of funds linked to Greensill.

Greensill Capital’s oversized exposure to the conglomerate GFG Alliance, the owner of struggling UK steel plants hammered by the economic fallout of the Covid-19 pandemic, quickly came to the fore. Greensill Capital said in its court filing that GFG is defaulting on its debts as it is in financial difficulty. 

Also, Germany’s Federal Financial Supervisory Authority, BaFin, is investigating Bremen-based Greensill Bank relating to the booking of GFG assets.

Greensill Capital had become a major financier of GFG, a fast growing over-leveraged conglomerate, often buying unprofitable assets, such as UK steel plants, which puzzled many in the business community. 

An indirect consequence of the Greensill failure and the freezing of its SCF facilities is that many small firms reeling from deep recession may go bust, creating more bad debts for banks. 

What do the bankers say? 

Reaction from bankers is mixed. Many will be asking themselves how much exposure they have to Greensill and other similar financial outfits — the European Central Bank would certainly like to know. Other bankers mutter that it is another “I told you so” moment, arguing that such events result from overly stringent post-GFC bank regulation. 

Will it provide the incentives?  

The Financial Stability Board (FSB) has been warning about shadow banking risks for years. Greensill Capital’s failure accentuates the sense of urgency to get something done. 

But unlike banks, these shadow entities are nebulous and amorphous organisations, constantly evolving on the fringes of the regulatory parameters and exploiting niches often out of reach of traditionally regulated entities. For regulators to control this is a bit like a game of whack-a-mole. Establishing further common global supervisory standards via the FSB would help significantly, so these firms cannot exploit international loopholes as Greensill and Wirecard did, but this will take time if indeed it ever happens. At a minimum, supervisors must deepen their co-operation on overseeing cross-border financial firms, particularly if they have opaque structures or sit on the edges of regulatory regimes. 

Shadow banks provide valuable services to the economy. The danger is that regulators may lump an activity-based focus on top of the existing entity-based approach, potentially leading to an avalanche of new potentially contradictory rules that could strangle ‘good’ financial innovation. 


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter