Shadow Banking, a financing alternative

Moris Beracha.- The financial crisis that we have been facing in the last few years has brought with it an excess of regulations and controls of the governments towards the traditional banking, diminishing the capacity of answer of the financial institutions when, among other things, granting credits. This scenario has prompted companies to seek new ways to finance themselves, giving rise to what Paul Mc Culley, an economist and senior executive of investment firm PIMCO, coined as ‘Shadow Banking’.

Shadow Banking is the concept used to define non-traditional financial activities and is constituted by entities that provide credit and borrow by avoiding the regulations applied to the banking system of a country. These organizations are very varied and range from venture capital companies, hedge funds, etc. Even crowd funding is considered shadow banking !

Shadow Banking has become a very interesting practice and a tool of growing power, where these new players have transformed themselves into transaction lenders, effectively replacing traditional banks. And it seems the business is working. According to estimates by the Financial Stability Board (FSB), an institution created to monitor the banking sector after the crisis, Shadow Banking now handles more than $ 75 billion. Certainly, it is a very respectable amount of capital.

Some government, traditional banks and entities voices such as the IMF, warn of the alleged dangers of shadow banking. They argue that these parallel finances are carried out without banking supervisors, which allows, among other things, institutions to lend without having to make provision for losses.

While some want to focus on the debate that Shadow Banking is a risk, I would rather see it from the angle of opportunity since the only thing clear is that the excess of controls and regulations to the bank have made it extremely inefficient in responding to the requests for credit and other financial facilities that they traditionally offered to their clients, while ‘Shadow Banking’ has come to replace them generating a really interesting and broad growth potential in these financial companies.

And what do you think?

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