The collapse of Greensill Capital has encouraged regulators to again look at the shadow banking industry. Chinese supervisors, however, are a step ahead, passing new rules at the end of 2020.

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The failure of Greensill Capital has reignited calls for greater scrutiny over the shadow banking industry, which is comprised of entities that fall outside the regulated banking space, including money market funds, hedge funds, broker-dealers and peer-to-peer lenders.  

Launched in 2011, Greensill Capital provided supply chain finance (SCF), which uses the higher credit rating of a large buyer to offer cheaper financing to its small suppliers, effectively providing earlier payment for their goods. By 2019, Greensill had reportedly extended $143bn of financing to more than 10 million customers and suppliers in 175 countries. It also securitised those receivables and sold them onto institutional investors. So far, so good, until it filed for insolvency on March 8, leaving the likes of Credit Suisse (and possibly others) exposed to the tune of billions.

“A striking feature of this saga is that Greensill Capital, like the failed payments group Wirecard, owned a regulated German bank while large parts of its operations fell outside mainstream banking regulation. The capacity of shadow banking to spring more dangerous systemic shocks should not be underestimated,” writes John Plender in the Financial Times.

Shadow banking includes useful — and needed — intermediation activities, including risk pooling, wealth management and securities lending. But it is this intersection of banks and shadow banks that is of greatest concern for central banks and regulators, mainly because they have limited visibility into, and oversight of, the totality of the industry.

At end-2019, the shadow banking sector accounted for almost half (49.5%) of the global financial system

At end-2019, the shadow banking sector accounted for almost half (49.5%) of the global financial system, according to the Financial Stability Board’s (FSB’s) most recent Global Monitoring Report on Non-Bank Financial Intermediation (NBFI), released in December 2020. NBFI accounts for an estimated $200tn in assets, increasing by 8.9% in 2019 and outstripping the banking sector’s 5.1% growth. Many fear that this expansion is a signal of mounting systemic risks.

According to the FSB report, the US accounts for the world’s largest share (30%) of what it calls “narrow measure assets”, which are parts of NBFI that “may pose bank-like financial stability risks”. But while the US leads the world in shadow banking assets, China is heads above the rest of the emerging market economies. According to data from the China Banking and Insurance Regulatory Commission (CBIRC), released in December 2020, the size of the shadow banking sector is estimated to be Rmb84.8tn ($13.04tn), or the equivalent to 86% of gross domestic product and 29% of the country’s total banking assets.

The Chinese authorities did not wait for a Greensill to happen on their doorstep to take action and had the foresight to release new regulations at the end of last year. In April’s cover feature, Asia editor Kimberley Long looks at how China’s financial supervisors are approaching the delicate task of reining in shadow banking activities without cutting off a key financing source during the Covid-19 recovery phase.

However, while many regulators are trying to get a better grip on the more established activities that make up NBFI, there may be another storm brewing. What may be a growing future concern is the role shadow banks are playing in the $1.82tn cryptocurrency market, which is a small slice of the grand total but growing quickly. They are stepping into a space where banks fear to tread — lending to investors or firms, such as hedge funds, that are speculating in Bitcoin and other cryptoassets. This opaque area of the market also warrants some scrutiny.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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