Do you remember that weekend in mid-September 2008?

Risk got out of hand for capitalism when Lehman Brothers, the financial services company that, with its puncture, was the catalyst for the latest global economic crisis, went bankrupt.

Since then, central banks have applied themselves to building slightly more solid pillars on which to prop up growth.

But the reinvention of finance in recent years hasn't ended something as primitive as greed, and now those same central banks have been spouting scary messages for months about a threat straight out of

.

The non-banking financial industry (IFNB), also known as shadow banking, already manages 49% of the planet's total financial assets.

We are talking about 239 trillion dollars in the hands of intermediaries that are not banks, but behave as if they were - although they do not have capital and transparency requirements as strict as they do.

Short of taking deposits, they offer a wide range of investment and financing opportunities, cover areas that banks fail to reach, and can even make the financial system more resilient to credit risk.

This includes a priori respectable and prudent entities such as pension funds, insurance companies or even

But when things go wrong they can trigger or amplify market stress and trigger panic, as a report from the Bank for International Settlements (BIS), a Basel-based central bank-owned body, recalls.

And lately there are a few things that are going wrong in the world.

Supervisors view the development of non-bank financing with mixed feelings.

The president of the CNMV, Rodrigo Buenaventura, said it clearly a few months ago: “The Spanish and European economy needs, in percentage terms, less bank financing and more non-bank financing.

This is a problem?

For me it is not, ”he answered himself.

“It would be a blessing for the Spanish economy.

International collective investing is generally sound, safe and stable.

Certainly no less than the banking sector”.

But there is a bitter debate about whether there is a high systemic risk associated with non-bank financial intermediation, and specifically, with collective investment, or with a part of it.

A debate where things are not black or white.

More information

What is 'shadow banking'?

The Financial Stability Board, a body created in 2009 after the G-20 summit in London, has long monitored this gigantic stock of assets managed by intermediaries from 29 countries that, in turn, represent 80% of world GDP (without Russian data).

In his latest report, dated December 20, he warned that a significant part of the shadow banking, the one with those 239 trillion in assets, is closer to the mud than ever.

There are 67 trillion dollars in the hands of intermediaries that could pose a risk to the stability of the entire system if there were massive withdrawals of liquidity.

Without wanting to scare, 67 trillion is more than what the economies of the euro zone, China and the United States together generate in a year.

As in the game of Cluedo, these assets are held by many types of institutions: fixed income funds, mixed funds, hedge funds, real estate funds, consumer loan companies,

custodian companies , credit insurance companies, financial guarantors,

insurers , securitization vehicles or structured financing vehicles.

Ordinary citizens should not care in the slightest about all of the above if it were not for the fact that the aforementioned entities have close (financing) links with sectors that make the economy work or that guarantee the welfare state in some countries, not to mention of its ties to conventional banking.

Marijan Murat (picture alliance/Getty Images) (dpa/picture alliance via Getty I)

Earthquake

The last mine exploded under the feet of the Bank of England last October.

A political event – ​​in this case, the crazy fiscal plan of former Prime Minister Liz Truss – triggered enormous turmoil that forced the monetary authority to use 73,000 million euros to buy sovereign bonds.

In that unintelligible language for mortals used by central bankers, the body chaired by Andrew Bailey came to recognize that British pension plans, which desperately needed liquidity, could not obtain it by selling their sovereign bonds because confidence had collapsed, since the fiscal plan of the then prime minister was going to add a stratospheric deficit to the public accounts.

And that was about to break the piggy bank of the workers of the United Kingdom, the same ones who one day hope to retire in a sunny little town in the Spanish Levant.

British pension funds offer

, which assure retirees that the money they have saved throughout their lives will be converted into a fixed payment when they finish their working cycle.

These schemes handle 2.3 trillion euros and more than half are in public debt bonds.

So far, nothing strange.

In order to fulfill their promises to the participants, many funds use an investment scheme called

(L DI).

Through managers, and with the invaluable help of investment banks, many pension funds bought derivatives to manage their portfolios, which theoretically protected the investments of retirees from the risk of shocks in sovereign bonds.

Who was going to deny that?

When the pound plunged on Truss's announcement, the selling of sovereign bonds spread at lightning speed as holders began to think that the country was not going to be able to meet its commitments.

The LDIs began to ask the funds for more money to maintain these “insurances” — what are known as

—, and pension fund managers sought that money… by selling more sovereign debt, which in turn caused their asset prices to plunge further.

The whiting bit its tail until the central bank intervened.

Guards in the vicinity of the Bank of England, in London (United Kingdom). Efe

It is just a small sample that the contagion chains exist and are closer to the pockets of savers than it seems.

Although it must be admitted that a pandemic and a war in Europe have not caused significant damage to that financial architecture, increases in interest rates can.

Raymond Torres, director of the conjuncture of Funcas, explains that the conditions that made huge masses of capital seek profitability in risky assets or borrowing in the era of negative rates are ending.

“The main risk is the lack of liquidity of some non-bank financial actors.

In the event of a one-off market crash, central banks can grease the liquidity machinery, but a systemic problem would affect the path of monetary policy.

It would be a stumbling block at a time when both the Federal Reserve and the ECB are withdrawing their stimuli and slimming down their balance sheets.

For Luis Garvía, director of the Master's Degree in Financial Risks at Comillas ICADE, perhaps there is not a planetary threat on the horizon, but rather many smaller tremors.

“There will be more and more unpredictable events that will stress test the system.”

The coronavirus was one of them.

“A year and a half ago, nobody expected this rise in rates, now it will cost more to finance, the water level will drop and we will see who was swimming without clothes.

The worst managers will appear in the photo”.

He does not rule out that the new normality could wipe out two or three investment funds, but he believes that shadow banking entities are becoming more resistant.

The proof of the above is called BlackRock, which 35 years ago did not exist and now has assets of more than 10 trillion dollars.

“The large funds manage more than 30 billion.

The apparent calm of the experts consulted does not hide the fact that no one knows what would have happened, for example, without the intervention of central banks in episodes like the one that the United States experienced during the Great Recession and that Ignacio de la Torre, economist, recalls. head of Arcano Partners, regarding the so-called monetary funds.

“To make an analogy, in a body the heart is the central bank.

We, companies and citizens, are muscles and we need someone to take the money (blood) from the heart to the muscles.

To simplify, in Europe this work is done mainly by banks, and in the US, by capital markets.

Most short-term financing in the US is done with promissory notes;

If that market dries up, you have a nose problem”.

Exterior view of the New York Stock Exchange, on January 3.

Michael Nagle (Bloomberg) (Bloomberg)

This occurred when the Fed had to provide liquidity to monetary funds to avoid chains of defaults.

“Companies use them a lot to manage their treasury.

If I leave my treasury in a bank, they don't pay me anything, but if I give it to a monetary fund, I can get a certain return”, says De la Torre.

The treasury is used by companies to pay expenses such as payroll, so it has to be available when they need it, something that monetary funds promise.

“During the great financial crisis, the market for daily trading in bills dried up and money markets were unable to honor their promises of daily liquidity.

That could have created a very serious problem had the Fed not intervened.”

Now he sees difficulties in the sovereign debt market with

that make liquidity disappear.

But he does not consider that the so-called shadow banking, in its strict sense, presents any more threats than the rest of the system.

The bank does not win

The abundant casuistry of these low intensity earthquakes (for now) does not hide the fact that the status quo between conventional banking and shadow banking has changed.

Since 2012, classic banking has been strengthened thanks to greater regulation and more requirements for solvency buffers.

But, paradoxically, shadow banking has gained more and more space for it as a lender.

A graphic example is what happens in the real estate sector and what happened before the bubble.

“Now the bank only finances a project when you have 50% of the homes sold.

But, if you're a developer, how do you finance buy-and-build?

Lung or asking for a loan ”, says an expert in the sector who prefers not to be quoted.

Private debt vehicles come into play, which, recalls this consultant, “have teams that were previously in bank risk management departments and analyze operations in the same way.

They ask you for guarantees beyond the assets themselves, whether they are from the parent company or even personal guarantees.

They don't want to stop charging."

Is there systemic risk from this?

“If we had asked anyone in the banking sector that question in 2006, they would have answered no,

that there is no risk of contamination in the mortgage market.

But there is probably a certain correlation in that a project defaults [break] and that of your neighbor too, because there is a part of macroeconomic risk ”, he admits.

Is this risk now greater than that of classic bank financing?

I don't believe it".

Contradiction

On the other hand, the bank employers' association (AEB) does believe so, which on many occasions has asked itself the use of having made the banking system more secure from the point of view of solvency and risk management if the risk moves to a part of the financial system that is less well known, worse regulated and supervised.

Vicente Bermejo, assistant professor in the Department of Economics, Finance and Accounting at ESADE, also thinks so, recalling that, unlike banks, shadow banking has different structures and is subject to different regulatory frameworks within each jurisdiction of the European Union, “which increases uncertainty”.

He adds that his relationship with banks is very extensive, and regrets that, “as always, regulation lags behind financial innovation.

Banks tend to be more regulated than non-bank financial intermediaries (NFIBs) and this can lead to imbalances.

The regulation must be consistent with the activity carried out by the IFNB.

Even so, this may not be enough and put banks at a disadvantage if they compete in similar activities with NBFIs”.

Especially worrisome is the credit granted to consumers, “which are usually granted to individuals at higher risk, sometimes unbanked, and who present greater difficulties in times of crisis.

These risky assets can be greatly affected in times of crisis and can put NBFIs with large exposures in difficulties”.

What underlies all this, says another source in the sector who asks not to be named, "is the fight of the central banks, and the ECB in particular, to make the activity of asset management fall within their regulatory umbrella and protect the banks, a

powerful

But many times in the offices they do not find out what is happening in the market and that is why they react late”.

The ultra-expansionary strategy of European monetary policy reduced the inventory of bonds held by investment banks and created a much more illiquid market.

“And now, when there is a

, many

from

which have ultra-leveraged strategies on sovereign bonds.

And, if that happens, it can

a

for liquidity, not for solvency, and drag a bank”.

Will there be more scares if interest rate rises continue?

Another expert who also requests anonymity responds with a simile.

“You can raise the temperature of the water from 0 to 100 degrees in a second.

If you do it in an hour, it will be just as bad, or worse.

The tightening of conditions had better be abrupt.”

Avoiding this deadly current is the task of men like Andrea Enria, president of the ECB's Supervisory Board, who last week launched from his blog what in banking language can be understood as a serious rebuke for not doing his homework.

“Not all banks are testing the operational effectiveness of liquidation procedures with regular 'fire drills,'” he said.

“The [bank's] management body and the risk committee must be informed without delay of market tensions, the main disputes over margins.

Regardless of when and how the next market crisis emerges, and the transmission channels through which it will spread to the banking sector, banks need to be well prepared and manage their counterparty credit risk to an acceptable level,

The ground, however, can burn underfoot.

The European Union is already discussing a change in several directives to strengthen supervision and liquidity requirements.

And Spain?

The joint amount of the assets of these entities, discounting those that are consolidated into banking groups, was 328,000 million euros in 2021, 8.1% more than in 2020. But it represents, according to the CNMV, "only 6% of the total financial system, below the proportion of other advanced economies (close to 14%)”.

Investment funds concentrate 91% of the assets considered to be of the highest risk, followed at a distance by securitization vehicles, with 6.2%.

The rest of the entities —financial credit establishments, securities companies and mutual guarantee companies— represent barely 3% as a whole.

Dangerous mutual funds, or defined benefit pension plans like in the UK, are rarely used in the country, and the funds have low leverage.

Ignacio Peña, president of Economistas Asesores Financieros of the General Council of Economists of Spain, explains that the risk of a manager is "absolutely separate" from the risk of its investment funds, and that these have strict liquidity requirements to avoid bankruptcy.

Be that as it may, it seems impossible to guess whether there will be a systemic crisis around the corner and who will be swept away by the current.

Perhaps the best advice is to go back to the lessons of the past.

Long-Term Capital Management, a hedge fund that had its glory days in the early 1990s, soon went bankrupt and had to be bailed out by other entities under the supervision of the Federal Reserve.

On its board of directors were two Nobel Prize winners in Economics.

Sam Bankman-Fried, co-founder of FTX, after his arrest on December 22.

Stephanie Keith (Bloomberg) (Bloomberg)

Cryptocurrencies are the weakest link

“If you have a wrong diagnosis of a problem, you will most likely have a wrong solution.

Even if you have the correct diagnosis, you may come up with a bad solution, but your chances of success are better.”

The advice of Jamie Dimon, president of JP Morgan, in his annual letter to investors last year was about how the financial system is being repositioned, with commercial banks dwindling in favor of shadow banks, fintechs and large corporations. technology companies.

More than 200 million customers visit Walmart stores in the United States each year, and the retail chain offers its customers banking services.

It's nothing new.

What else is the El Corte Inglés card?

The difference is that now the technological lever has catapulted the corporate giants to infinity and beyond.

Apple has a huge presence in this arena, with its Apple Pay and Apple Card apps.

Same as Google.

Both have data on hundreds of millions of customers, which gives them a huge advantage over the rest.

Technology is also behind the development of cryptocurrencies, which, in theory, arose in response to the 2008 financial crisis in the form of decentralized finance or DeFi, “that is, financial activities based on automated smart contracts […] that mainly involve permissionless mechanisms and anonymous transactions”, describes the Bank for International Settlements (BIS).

A system that promised to end intermediaries designed to avoid cascading insolvencies.

Too bad the stories do not end as they begin.

Cryptocurrencies seem to be operating within their own ecosystem, with few services making it to the real world, even though there are attempts such as the Government of El Salvador to adopt them.

For this reason, most of the experts consulted for this report define their risk as something potentially lower, more encapsulated, with less possibility of contagion to the financial system.

Ultimately, they argue, their losses will have to be borne by the adherents themselves.

In any case, there are those who think that a great crypto crisis is hanging over our heads.

Hyun Song Shin, the head of research at the BIS, published in mid-December the reasons why he believes crypto is more centralized than the world realizes.

“Many protocols turn out to be highly concentrated in terms of who rules and who controls things.

Often, it is the founder and a small number of VC backers who are in control, as evidenced by the implosion of Terra in May.

In most cases, crypto is decentralized in name only.”

The FTX Fraud

Song Shin gives another reason that is explained with an example: the fall of FTX, an intermediary run by a cheeky gang led by Sam Bankman-Fried, now in prison.

Companies like yours channel the flow of new investors, the oxygen that keeps speculation alive in the crypto sphere.

“FTX was like a bank”, describes Alejandro San Nicolás Medina, professor of Social Sciences at the International University of Valencia and an expert in

—as well as a believer in the benefits of the crypto world—.

“For a euro to reach a crypto, you have to buy it.

The decentralized economy exists and is used.

I can show you how I exchange a cryptocurrency, leverage it or transfer it to a third party in a few minutes without going through an exchange.

But where is the catch?

FTX and similar companies are

, supposedly trusted intermediaries”.

They are equivalent, in a simile with the real world, "to the man who changes your euros at the airport when you travel to another country."

San Nicolás explains that exchanges have nothing to do with the blockchain.

platforms

are not decentralized.

When an

is poorly policed, it can cause these things to happen.

For this reason, the day after the fall of FTX, the rest of the intermediaries published their fund reserves, to show the world that they were not like FTX”.

The gateway to bitcoin, in short, can also be a gateway to hell.

The solution to protect unwary investors, according to some voices, would be to "go back" and eliminate intermediaries from the market.

Other experts, like San Nicolás, think that the big cryptocurrency custodians should be audited so that the next FTX does not happen.

Any public response should start by determining the true value that cryptocurrencies bring to separate the wheat from the chaff.

It is, as the head of JP Morgan says, a matter of not making a mistake in the diagnosis.

ABC's of shadows

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