Mark Carney. Flickr/Bank of England
When Mark Carney announced last year the Bank Of England “is open for business”, at the time, he claimed it was only to be for banks who were properly and tightly regulated. But with the world distracted by the opening match of the world cup finals, it went largely unreported that George Osborne and Mark Carney also announced in their Mansion House speeches that they intend to rip up Bank Of England lending rules to allow the BofE to start lending to “shadow banks”.
Shadow banks are not banks at all, but a term coined by economist Paul Culley in 2007 for financial institutions such as investment banks and brokers who lend and invest. If shadow banks investments go wrong their lenders, i.e. banks, consumers and investors, go bust as shadow banks have no back up security from central banks to bail them out because unlike traditional banks they are largely unregulated and have no depositors.
During the financial crisis, about $400bn worth shadow banking investments shrank to zero within weeks, causing huge losses for lenders and investors, and as Lara Kodres, the Assistant Director of the IMF’s Monetary and Capital Market’s explained in June 2013, “Shadow Banking, in fact, symbolizes one of the many failings of the financial system leading up to the global crisis”.
Ironically, in February this year The Sydney Morning Herald reported "The second most senior Goldman Sachs executive has warned the world risks sowing the seeds of the next financial crisis through regulation aimed at making banks safer."
As banking regulations have tightened so bankers are moving to work for, and borrowers are moving to borrow from, these shadow banks instead. Ex-Government Minister and banker, Lord Davies, has chosen to leave banking and has taken up the post of vice-chairman of US private equity firm Corsair, saying: “Shadow institutions are less onerously regulated and they’re more entrepreneurial.”
Goldman Sachs chief operating officer Gary Cohn claims “forcing banks to hold more capital, regulators risked encouraging the unregulated "shadow" banking sector, so it became the next problem”. Is Mr Cohn warning there is another financial crisis looming in the shadow banking sector?
In December, Mark Carney himself reported he sees shadow banking in emerging markets (China) as the biggest global risk, while a report in the Telegraph warned "Currency crisis at Chinese banks 'could trigger global meltdown’. A rise in foreign funding at China's banks poses a threat for international lenders”.
A more recent report on the Chinese shadow banking crisis in the Economist states “The biggest threat to the system is that by moving too forcefully to rein in shadow lending, regulators accidentally precipitate a run on shadow banks”. The report goes on to say “Standard & Poor’s, a ratings agency, argues that reforms could lead to “a turbulent period in which funding could dry up as the domestic market struggles to re-price risk”. That is a polite way of saying that there is no easy way out of China’s shadow-mess.”
So we are told by bankers and shadow bankers 'don’t regulate traditional banks or it risks moving the problem to shadow banks' and we are told by an international credit rating agency 'don’t regulate shadow banks or it might make liquidity dry up'.
And that is exactly what happens when a financial crisis is looming, liquidity dries up, and with the looming financial crisis in China and banks now too tightly regulated to bail the shadow bankers out with more money leaving shadow banks no liquidity to bail them out if a financial crisis ripples around the world from China.
Which is why Mark Carney and Ben Broadbent, both ex long term employees of Goldman Sachs, who, as of March 2014, hold two of the most powerful roles in the BofE, want the lending rules ripped up, despite knowing Goldman Sachs alone had to be bailed out with $782 billion of state loans after it changed its lending rules to include shadow banks.
And as Mark Carney admits, in his Mansion House Speech “the UK is home to the third largest ‘shadow banking system’ with assets of $9 trillion” this gives us an idea of the scale problem the Bank of England will face in the event of a shadow banking financial crisis.
With a minimum $9 trillion price tag based on assets that can lose their value overnight we can now understand exactly why George Osborne wants to put a cloak of secrecy round the Bank Of England’s proposed new relationship with shadow banks, when he admitted to a select committee “shadow banks will be difficult to regulate to the Nth degree” and he “advocates the need for secrecy in dealing with shadow banking incidents.”
And with the shadow banking crisis looming in China that is exactly why the Bank Of England lending rules should not be changed – because this is an attempt to circumvent the regulations put in place which are working for banks and protecting us from the looming financial crisis in China, meaning the investors and shareholders will have to bail themselves out.
As the Financial Times warns “"Broadening access to central bank liquidity runs the risk of creating moral hazard in the financial system as more firms gain access to official liquidity"
Lara Kodres, from the IMF states “Shadows can be frightening because they obscure the shapes and sizes of objects within them. The same is true for shadow banks. Estimating the size of the shadow banking system is particularly difficult because many of its entities do not report to government regulators” like the Bank Of England.
A Federal Reserve Bank Of Dallas Staff report, Understanding the Risks Inherent in Shadow Banking, the authors conclude as shadow bank products gain their high quality credit ratings based on the parent company, rather than the risk of each product offered, shadow banking activities should not benefit from explicit or even implicit access to a central bank’s discount window or deposit insurance and that taxpayers should never again bail out shadow banks”.
George Osborne's and Mark Carney's widely unreported attempt to give these unregulated companies the holy grail of direct lending from the Bank of England at a time Mark Carney has admitted these companies could be in deep financial trouble as a result of the looming “shadow banking” crisis in China, would be a grossly irresponsible act.
The worst of this being, the BBC and the mainstream media refused to warn the British public about this important announcement in the Mansion House speeches by Mark Carney and George Osborne. When I complained to the BBC about their lack of coverage, they gave their bog standard reply—we decide what gets reported and the BBC decided this was not a story of national interest—when this is probably the most important national interest story since the financial crisis began.
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