Banking crisis may be fueling the rise of so-called “shadow banks”
Banking crisis may be fueling the rise of so-called “shadow banks”
Between the regional bank crisis and over a year of rate hikes from the Fed, all eyes are on credit conditions right now. As banks tighten their standards on loans, so-called shadow banks are seeing an opportunity to grow where banks might be pulling back.
“Marketplace” host Kai Ryssdal spoke with New York Times business reporter Lauren Hirsch about the rise of shadow banks. The following is an edited transcript of their conversation.
Kai Ryssdal: We’ve gotta define some terms here — “shadow banks,” please.
Lauren Hirsch: “Shadow banks” is actually a bit of a controversial term. I got some feedback on my original article. The IMF defines it as basically any financial institution that doesn’t take deposits but loans — so that can be money market funds, that could be hedge funds, that can be private equity firms. And the big kind of distinguishing factor between your Apollos of the world and your JPMorgans is Apollo doesn’t take deposits, so it doesn’t have kind of everyday customers giving you their cash and leaving it there.
Ryssdal: Does it tell you anything that the shadow banks don’t like to be called shadow banks?
Hirsch: It tells you a lot, they hate it. They view it as a PR problem. But many people just view it as kind of, you know, a definition of what they are, for better or for worse.
Ryssdal: The reason we got you on the phone is because these shadow banks are playing an ever-increasing role in lending in this economy, and I want you to tell me how that’s come to pass.
Hirsch: So it’s really been almost a decade-long trend. You know, after the financial crisis, the government put in a lot of regulations on the biggest banks. That was all part of Dodd-Frank. I think many people would argue — at this point — most of those regulations were a good idea. But what happens is, when there’s more regulations, the cost of capital goes up, and it becomes more complicated to extend loans. And so money and a lot of the lending business ended up leaving the regulated banks, and it ended up going to the Apollos and Blackstones of the world, because they could effectively move much faster at extending loans and, you know, occasionally even do loans that your traditional, very large regulated bank might not be able to do.
Ryssdal: Talk to me then about the risk involved here, because banks are regulated for a reason. And if shadow banks aren’t regulated but are increasing their share of the loan business in this economy, where are we?
Hirsch: Well, that’s the million-dollar — potentially billion-dollar — question. The biggest concern if you chat with industry advocates or academics is you have a huge portion of the economy moving over to these unregulated institutions. And not only are they not kind of privy to the same requirements as your large banks, but you just by definition have less information about them. And so it’s almost impossible for us to have full clarity and insight as to whether or not there are mistakes that have been made. Now, if you talk to the industry, they say a couple of things. First, because they aren’t a bank without deposits, if they do make a mistake, the only one that is harmed, in their views, is their own investors. So that’s their defense, I think — who wins out in the risk analysis is still yet to be seen.
Ryssdal: It’s incumbent on me to point out here that, as you mentioned, the rise in this kind of lending has taken place over the last decade or so. The last decade or so was a time of extraordinarily low interest rates with — until relatively recently — not a great likelihood of recession. And it’s just different now.
Hirsch: It’s just different now. And so we are in this great experiment. We have this industry that has built up over the past 10 years. It’s poised to become even bigger, frankly, as, you know, the regional banks fall, the larger banks are kind of constrained. And it’s just a totally untested model. The one thing that everyone’s been saying over the past six months to me is it’s really easy to make money when everyone is making money — you know, when interest rates are low — and this is an entirely different environment. I covered the bankruptcy of Vice this morning. There were a couple other bankruptcies that happened, and there’s more to come, you know, we’re seeing defaults. And so the big question will be, are these systems and these loans that they’ve put out, you know, can they effectively withstand it?
Ryssdal: The Treasury Secretary Janet Yellen has said she wants to bring shadow banks under a more regulatory, strict sort of paradigm. Do you anticipate that actually happening?
Hirsch: She has said that you will hear noise every now and then. I will tell you, when I talk to people kind of behind the scenes, I do get the sense it’s maybe fourth or fifth on their priority list. It’s not one or two. They’ve been effectively been putting out a fire with the regional bank crisis. You know, obviously, there’s debt ceiling drama going on right now. And so it does seem like something that tends to go to the bottom of those priorities until or unless there’s a real problem to address.
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