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When every solution proposed to resolve a problem meets a wall of opposition it's time to question the problem. That's where we are with money market mutual funds.
March 14 -
The danger remains. It is based on the vulnerability of shadow banking liabilities resulting from their mismatch to the assets being funded.
January 4
The shadow banking system is down but not out.
That's the conclusion reached by the Deloitte Center for Financial Services in a new report that examines the scope — and the relevance — of a sector that has received its fair share of blame for causing the financial crisis.
Deloitte says that assets controlled by the the shadow banking system — including money-market mutual funds and asset- and mortgage-backed securities — have declined by more than 50% in the last four years, to $9.53 trillion at Dec. 31. As a result of this sharp decline, the traditional banking sector that four years ago was smaller than the shadow banking system is now roughly $8 trillion larger, according to Deloitte.
The report's authors said they expect the shadow banking system to remain suppressed in the near-term due to the volatile state of the economy and an uncertain regulatory climate. But, they added, "it is unlikely it will cease to exist; repurchase agreements and securities lending, to name two components, are vital to the functioning of a modern financial system and will likely bounce back eventually."
The report, released Tuesday, was the first of regular quarterly reports Deloitte plans to produce on the topic of shadow banking. In its executive summary, the consulting firm said the purpose of the report — dubbed the Deloitte Shadow Banking Index — is to "more closely measure size, importance, effect of market and impact of regulatory actions, as well as a way to assess the potential impact of shadow banking on regulated markets."
For now, Deloitte will solely examine the shadow banking sector in the U.S., though it did not rule out including global markets in future studies.
Broadly, shadow banking is defined as a market-funded, credit intermediation system in which liquidity is provided through securitization and secured-funding mechanisms. Shadow banking entities exist at least partly outside of the traditional banking system and do not have access to deposit insurance or a central bank.
There's widespread disagreement, however, over which entities and activities are part of the shadow system. Some definitions will include any financial intermediaries that serve as proxies for traditional banks, such as hedge funds, finance companies, payday lenders and insurance firms, while others might include activities such as swaps and derivatives trading.
Deloitte's definition is relatively narrow — which could explain why its estimates on the size of the shadow banking system are significantly lower than estimates from the Financial Stability Board or the Federal Reserve Bank of New York. Its index includes money-market mutual funds, commercial-paper conduits, private-label mortgage-backed securities, collateralized debt obligations, repurchase agreements, securities lending and agency mortgage-backed securities. It does not include hedge funds, mutual funds, financial companies or any other financial entity.
Deloitte officials said that the scope of the shadow banking system going forward will depend largely on efforts to regulate its activities.
Many regulators, including Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, have pinned at least part of the blame for the financial crisis on the largely unregulated activities of the shadow banking system and certain provisions of the Dodd-Frank Act were drafted with those concerns in mind. It is up to regulators to ultimately draft those regulations, so it remains unclear how they could affect the activities of the secondary markets and asset-backed commercial paper conduits, for example.
"Regulatory headwinds against the shadow banking system will likely be the No. 1 influence in changes that affect" the sector, Don Ogilvie, the independent chairman of the Center for Financial Services and former chief executive of the American Bankers Association, said in a news release. "Given that major regulatory efforts have either been enacted or are in the works to help reduce the size of this important sector…this is a conversation that the market needs to have."
