Shadow banking in EU, and US regional banks
London Business School’s Professor Richard Portes is a leading voice for the School on banking, international finance, and financial regulation.
Portes was recently interviewed by Bloomberg’s Neil Callanan (Wall Street’s New Zombies May Well Be Regional Banks), and by the Irish Times (Ireland and Luxembourg step up calls for tougher shadow banking rules) on matters concerning, respectively, the continuing turmoil in among the US regional banking community, and calls from leading EU fund centres for tougher global rules on shadow banks.
In the Bloomberg article on US regional banks, Professor Portes says that one of the dangers now, following the convulsions in the US banking sector earlier in the year, is that smaller banks could decide to pursue high-risk loans that yield more than their current portfolio as they try to avoid becoming zombie lenders.
A zombie firm typically refers to a company that does not earn enough to pay its interest costs for an extended period. “That’s the way to sudden disaster as opposed to the slow leak in the tire,” Portes said.
In Europe, senior officials from the two European Union member states, Ireland and Luxembourg, which together host shadow banks with about €10 trillion in assets, want regulators to develop tougher standards for a sector that remains subject to lighter regulation than traditional lenders despite holding about half of all financial system assets.
Rattled by the recent near meltdown of some pension funds, at the end of last year, UK regulators announced that they were pressing ahead to tighten oversight of the shadow banking sector, taking the lead ahead of possible co-ordinated international action. UK regulators could soon pre-empt recommendations by the G20's Financial Stability Board (FSB) to require permanently higher liquidity buffers for Liability Driven Investment (LDI) funds - used by UK defined benefit pension schemes - backed by regular stress tests. Now Ireland and Luxembourg have intensified calls for tougher global rules on shadow banks in a bid to curb the risk of further financial turmoil erupting from a sector that spans everything from hedge funds to crypto firms.
Senior officials from the two European Union member states, which together host shadow banks with about €10 trillion in assets, want regulators to develop tougher standards for a sector that remains subject to lighter regulation than traditional lenders despite holding about half of all financial system assets.
Ireland and Luxembourg were at the centre of a recent crisis, when rapid selling by funds hosted by those countries forced the Bank of England to launch a £65 billion (€75 billion) bond-buying programme in September.
In response, Dublin wants a framework for all shadow banks that considers not just the risks those individual firms pose but the system-wide impact.
“It’s the old story that you don’t want to damp down the domestic sector which is producing a lot of tax revenues and which puts you in the front on an international stage,” said Richard Portes, who is co-chair of the European Systemic Risk Board’s joint expert group on shadow banking.
