Use of ‘shadow banking’ term has been counter-productive to the non-bank finance sector

LONDON, UK, January 21, 2016 /EINPresswire.com/ -- The perception of so-called shadow banking as something to be afraid of is challenged in the February update of TheWealthJournal.net (TWJ). The author, TWJ Publishing Editor David G Rose claims the term was originally coined as a PR tool to promote a paper produced by economist Paul McCulley, when he was chairman of PIMCO in 2007. The result was a highly emotive, PR-originated term being quickly adopted by the media but which, in fact, completely misrepresented the reality.

Rose believes there has been a great deal of myth-making around the 'shadow banking' term. The Financial Stability Board (FSB)'s Global Shadow Banking Monitoring Report 2012 says that shadow banking “…grew rapidly before the crisis, rising from $26 trillion in 2002 to $62 trillion in 2007.” Reinforcing this implication that shadow banking was in some way to blame for the crash, Yale professor Gary Gorton, an 'expert in financial panics', wrote in Barron’s (December, 2012) that “…the core of the meltdown, was the shadow banking system of non-bank firms.” This coincided with the IMF’s Shadow Banking: Economics and Policy document (December 4, 2012) stating shadow banking “…played a significant role in the run-up to the global financial crisis…”.

In his article, Time to Call Time on Shadow Banking, Rose uses data from the 2007 Cap-Gemini/Merrill Lynch World Wealth Report to argue that the ‘growth’ of so-called shadow banking can be attributed to the flight of private capital from the traditional banking network prior to the 2008 crash. This private wealth found ‘safe havens’ in alternative institutions such as hedge, pe and vc funds where it was largely unaffected by the crash. Additionally, the years since 2008 has seen a growth in private and direct investment funds with multi-family offices having increasing influence in the market. Rose argues that what should be called ‘non-bank finance’ has largely filled the corporate and project finance void left by the failed traditional banking network.

The FSB's 2015 Shadow Banking report (which valued the sector at $75-trillion) has gone some way to take the emphasis off 'shadow banking' and refers to ‘non-bank financial intermediation’. Both the IMF and FSB are increasingly using ‘non-bank finance’ in their ‘shadow banking’ reports. The EBA (European Banking Authority) said in its ‘Final Guidelines on Shadow Banking’ report in November 2015 that “…alternative capital…enhances the efficiency of the financial sector”.

In closing Rose said: "It makes as much sense to blame the crash on shadow banking as it does to blame it for climate change."

ENDS

David G Rose
TheWealthJournal.net
+44 1905 570365
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