“Shadow Banks” pose a serious risk to the market and your assets because they are non-banks that lend like banks, but with far less oversight or accountability.
April 25, 2019
At the heart of the last U.S. financial crisis in 2008 was a $52 trillion “non-banking” industry that lent unqualified borrowers money for mortgages and refinancing.
You might think U.S. officials would learn a lesson from the Great Recession, and make this form of “non-banking” illegal. Alas, this industry thrives in 2019, and it appears a similar “script” is being followed … one that may lead right to another crash.
At CNBC, we get their take on this developing crisis
Nonbank lending, an industry that played a central role in the financial crisis, has been expanding rapidly and is still posing risks should credit conditions deteriorate.
Often called “shadow banking” — a term the industry does not embrace — these institutions helped fuel the crisis by providing lending to underqualified borrowers and by financing some of the exotic investment instruments that collapsed when subprime mortgages fell apart.
Not all of these “shadow banking” companies do business in the U.S., but most (29%) do. China is a close second.
If history repeats itself, and the “exotic” investments cause another market recession, your assets may be put in serious jeopardy. The resulting market panic can affect your portfolio even if you aren’t directly invested in them.
And the biggest danger to your portfolio may come from the fastest-growing part of the “shadow banking” sector.
$36.7 Trillion in “Significant Risk” Assets
The biggest risk to the economy from the “shadow banking” industry seems to come from a category called collective investment vehicles.
Over at PYMNTS.com, they summarize an incredibly dangerous growth trend in high-risk assets:
Data has also shown that shadow banking share of “collective investment vehicles,” which includes bond funds, hedge funds, money markets and mixed funds, have increased by 130 percent to reach $36.7 trillion. In addition, non-bank financials have grown 61 percent to $185 trillion. By comparison, traditional bank assets had a 35 percent boost to reach $148 trillion during that same period.
Bond ratings agency DBRS highlights the increasing danger from this sector of the “shadow banking” industry in a report titled “Out of the Shadows”:
DBRS sees significant risks stemming from continued growth in shadow banking globally. Assets are now at $52 trillion globally, up from $30 trillion in 2010 according to the FSB. Weaknesses in these nonbank FIs arising in their maturity intermediation, liquidity, leverage and credit transformation could result in runs that would exacerbate financial market stress.
This massive rise in risk within the growing “shadow banking” industry comes on top of unprecedented risks posed by a giant wealth bubble about to burst in the U.S.
Even JP Morgan Chase CEO Jamie Dimon is concerned. He issued a stern warning to investors:
“The growth in non-bank mortgage lending, student lending, leveraged lending, and some consumer lending is accelerating and needs to be assiduously monitored,” said Dimon.
Bottom line: Banks are at risk. The stock market is at risk. The housing market is at risk. Doesn’t matter if you’re in cash, stocks, or real estate… you need to diversify now so you don’t lose your shirt when the next financial crisis hits.
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