>Really seems like Wall Street is in love with the term "shadow banking",
Actually, the hedge fund and private equity fund people hate that term because it implies something nefarious is happening. In reality, the new post-2008 crisis bank regulations in both Europe and USA to ensure stability causes a new phenomenon to emerge: Non-banks lending money to companies that banks are not allowed to lend to.
Every economist and financial regulator knows this became a side-effect of the more stringent financial regulations. So the "too big to fail" banks will still lend millions to big companies like Microsoft and Apple, but the $50m companies are too small and too risky to bother with.
Look how these "shadow" lending transactions keep emerging...
- a billion dollar pension fund is woefully short of its obligations to pensioners and needs a higher yield on its money. Buying safe US T-bills that yield 1% interest is not enough. They need to look at alternative asset classes that gets them in that ~8% range.
- a medium-size company needs $50 million loan to expand its business and is willing to pay a higher interest rate than 1% T-Bills. (That makes sense since the company doesn't have the same credit worthiness as the US Government.)
- If the pension fund (needing to put their money to work) and the company (needing a loan) can match up with each other, they can help each other's goals. But the pension fund isn't in the business of analyzing credit risk or providing loans directly. Likewise, the owner of the company doesn't have the time to fly all over the country and meet with 100 different pension fund officers.
That's where middlemen like private equity come in. They're the ones with the staff of credit analysts. The "back office" of the private equity fund that analyzes a company's credit worthiness does much of the same work that the credit analysts at JP Morgan, Bank of America, Wells Fargo, etc did. They become the "shadow bank". Of course, they also charge management fees and a % of the profits for their "financial intermediary" services.
The middle market's underlying need for credit never disappeared. The new bank regulations just inevitably shifted the loan transactions to a different set of players.
> To fund all this loan-making, the shadow banks have turned to insurance companies, pension funds, university endowments and wealthy investors, offering them a chance to buy into a diversified pool of loans that offer returns ranging from 6 percent to 13 percent, depending on the level of risk they are willing to assume.
If some hedge funds and "wealthy investors" want to take on risky investments that are "unregulated" I'm all for it. Would you agree the risks for systemic collapse come in when it's straddled onto say insurance companies or pension funds?
I've seen the term "rent seeking" used a few times here on HN, and I have no idea what it means. For those curious:
Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The most common occurrence is when a company or industry lobbies the government to receive special subsidies, grants, and tariff protection. The term "rent" in economics means receiving a payment that is over the costs involved in the production of the item or keeping the item in service. These actions do not produce any benefit for the community-at-large but only redistribute taxpayer's resources.[0]
> And household debt has grown no faster than household income and is concentrated in households best able to pay it back.
I'm not so sure about this - what I'm thinking is that the next (current?) bubble is in auto lending. I'm seeing tons of advertisements saying "We will lend up to 72 months with very little down". With the average new car priced around $37500 that's a payment in the mid $500's for someone with good credit. And I suspect the people doing this only have an average credit score so theirs will be higher.
That's absolutely jaw-dropping. I assumed that was a made-up Internet stat, and was going to ask for a cite, but some quick web searching confirms it.
I'm a used car guy, typically buying vehicles 2-3 years old, and would never contemplate paying above $20k. Even a brand new sedan (e.g. Nissan Altima, Honda Accord) is around $23k MSRP. A crossover family vehicle (e.g. Nissan Rogue, Honda CR-V) is around $25k.
What on earth are people purchasing, that the AVERAGE price is a low-to-mid range Mercedes?
My theory 2 years ago was that the likes of Uber, Lyft et al. would cause more and more people to buy new cars that couldn't really afford it. Should demand for ride sharing ever stall or fall off, the continued increase in people entering the "gig economy" workforce in such a levered manner would be catastrophic to the auto loan industry.
Brex, at least currently, isn’t the kind of card where you carry a balance. Instead they look at your bank account and say “you have a million dollars in there, you can spend 100K this month” (not real numbers). You pay it all back at the end of the month.
So while not immune from risk, it’s considerably less risky, and works over a shorter time frame, than other credit options.
Zero down payment isn't even legal in Canada and anything less than 20% down and you must purchase mortgage insurance. I'm amazed that 0% is allowed in the US after 2008.
US banks, overall, have the highest reserve ratio in recent history. US banks currently have a reserve ratio of nearly 100% or apx 1x leverage (see https://seekingalpha.com/article/2484795-u-s-banks-are-now-o... for more details). IIRC, the reserve requirement for large banks is 10% and historically, as cascom alludes, this is about where most US banks were at (i.e. about 5x to 10x leveraged) historically. But the that has not been the case for almost a decade now. So US banks have plenty of capital assets to offset loan losses.
The "shadow banking" services that are rising are coming about because normal banks are unwilling to take on even moderately risky lending. Their demands for loans are now extremely stringent, especially for smaller and middle-tier business customers. This demand is thus being filled by different, non-traditional, sources, i.e. "shadow banking".
The situation in overseas, especially Europe, is very very different. Many large European banks are currently operating with reserve ratios of only a few %. I don't know if this means there is less "shadow banking" in europe or if they just have far too much sovereign debt on their books.
Is this why I've been seeing signs advertising something like "learn how to flip houses like a PRO! Call 555-555-5555" popping up around my little suburban town? Also bank managers hitting up my elderly relatives for home equity loans again.
It feels very much like we're in 2002-2005-ish again.
I suspect that there cannot be effective regulation of any industry without a technological overhaul to money such as moving to cryptocurrency and smart contracts.
Especially now with new technologies coming up all the time, companies will just go around the laws.
Doing something like that is pretty far-fetched and would require a new type of technological government. But to me there is a structural problem with the relationship between money and government (in their current low-tech forms) in society.
[+] [-] not_a_moth|6 years ago|reply
Yet we know exactly who the participants are, the types of firms, and their practices.
Step 1 to better regulation of creative rent seeking is to stop treating it like it's nebulous.
[+] [-] jasode|6 years ago|reply
Actually, the hedge fund and private equity fund people hate that term because it implies something nefarious is happening. In reality, the new post-2008 crisis bank regulations in both Europe and USA to ensure stability causes a new phenomenon to emerge: Non-banks lending money to companies that banks are not allowed to lend to.
Every economist and financial regulator knows this became a side-effect of the more stringent financial regulations. So the "too big to fail" banks will still lend millions to big companies like Microsoft and Apple, but the $50m companies are too small and too risky to bother with.
Look how these "shadow" lending transactions keep emerging...
- a billion dollar pension fund is woefully short of its obligations to pensioners and needs a higher yield on its money. Buying safe US T-bills that yield 1% interest is not enough. They need to look at alternative asset classes that gets them in that ~8% range.
- a medium-size company needs $50 million loan to expand its business and is willing to pay a higher interest rate than 1% T-Bills. (That makes sense since the company doesn't have the same credit worthiness as the US Government.)
- If the pension fund (needing to put their money to work) and the company (needing a loan) can match up with each other, they can help each other's goals. But the pension fund isn't in the business of analyzing credit risk or providing loans directly. Likewise, the owner of the company doesn't have the time to fly all over the country and meet with 100 different pension fund officers.
That's where middlemen like private equity come in. They're the ones with the staff of credit analysts. The "back office" of the private equity fund that analyzes a company's credit worthiness does much of the same work that the credit analysts at JP Morgan, Bank of America, Wells Fargo, etc did. They become the "shadow bank". Of course, they also charge management fees and a % of the profits for their "financial intermediary" services.
The middle market's underlying need for credit never disappeared. The new bank regulations just inevitably shifted the loan transactions to a different set of players.
[+] [-] lbotos|6 years ago|reply
> To fund all this loan-making, the shadow banks have turned to insurance companies, pension funds, university endowments and wealthy investors, offering them a chance to buy into a diversified pool of loans that offer returns ranging from 6 percent to 13 percent, depending on the level of risk they are willing to assume.
If some hedge funds and "wealthy investors" want to take on risky investments that are "unregulated" I'm all for it. Would you agree the risks for systemic collapse come in when it's straddled onto say insurance companies or pension funds?
[+] [-] all2|6 years ago|reply
Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The most common occurrence is when a company or industry lobbies the government to receive special subsidies, grants, and tariff protection. The term "rent" in economics means receiving a payment that is over the costs involved in the production of the item or keeping the item in service. These actions do not produce any benefit for the community-at-large but only redistribute taxpayer's resources.[0]
[0] https://www.investopedia.com/terms/r/rentseeking.asp
[+] [-] chiph|6 years ago|reply
I'm not so sure about this - what I'm thinking is that the next (current?) bubble is in auto lending. I'm seeing tons of advertisements saying "We will lend up to 72 months with very little down". With the average new car priced around $37500 that's a payment in the mid $500's for someone with good credit. And I suspect the people doing this only have an average credit score so theirs will be higher.
[+] [-] StevePerkins|6 years ago|reply
That's absolutely jaw-dropping. I assumed that was a made-up Internet stat, and was going to ask for a cite, but some quick web searching confirms it.
I'm a used car guy, typically buying vehicles 2-3 years old, and would never contemplate paying above $20k. Even a brand new sedan (e.g. Nissan Altima, Honda Accord) is around $23k MSRP. A crossover family vehicle (e.g. Nissan Rogue, Honda CR-V) is around $25k.
What on earth are people purchasing, that the AVERAGE price is a low-to-mid range Mercedes?
[+] [-] venantius|6 years ago|reply
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] dsfyu404ed|6 years ago|reply
[+] [-] temp129038|6 years ago|reply
It would be quite something if tech and not banks caused the next great recession.
[+] [-] MaxGabriel|6 years ago|reply
So while not immune from risk, it’s considerably less risky, and works over a shorter time frame, than other credit options.
[+] [-] Waterluvian|6 years ago|reply
[+] [-] nugget|6 years ago|reply
[+] [-] YeahSureWhyNot|6 years ago|reply
[+] [-] duxup|6 years ago|reply
[+] [-] blackbrokkoli|6 years ago|reply
[+] [-] cascom|6 years ago|reply
The typical bank in the US is levered ~5-12x which means, many of these "shadow banks" are unlevered, this creates an entirely different dynamic
[+] [-] rmah|6 years ago|reply
The "shadow banking" services that are rising are coming about because normal banks are unwilling to take on even moderately risky lending. Their demands for loans are now extremely stringent, especially for smaller and middle-tier business customers. This demand is thus being filled by different, non-traditional, sources, i.e. "shadow banking".
The situation in overseas, especially Europe, is very very different. Many large European banks are currently operating with reserve ratios of only a few %. I don't know if this means there is less "shadow banking" in europe or if they just have far too much sovereign debt on their books.
[+] [-] RandomInteger4|6 years ago|reply
[+] [-] yardie|6 years ago|reply
[+] [-] arisAlexis|6 years ago|reply
[+] [-] pascalxus|6 years ago|reply
[+] [-] lone_haxx0r|6 years ago|reply
[+] [-] nabla9|6 years ago|reply
[+] [-] dang|6 years ago|reply
[+] [-] WC3w6pXxgGd|6 years ago|reply
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[+] [-] btcbanking|6 years ago|reply
[+] [-] apmorrison0|6 years ago|reply
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[+] [-] Hnrobert42|6 years ago|reply
[+] [-] RandomInteger4|6 years ago|reply
It feels very much like we're in 2002-2005-ish again.
[+] [-] subpixel|6 years ago|reply
[+] [-] klyrs|6 years ago|reply
[+] [-] ilaksh|6 years ago|reply
Especially now with new technologies coming up all the time, companies will just go around the laws.
Doing something like that is pretty far-fetched and would require a new type of technological government. But to me there is a structural problem with the relationship between money and government (in their current low-tech forms) in society.
[+] [-] vageli|6 years ago|reply
Can you expand on this? Your comment intrigued me.