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The $70 Trillion Problem Keeping Jamie Dimon Up At Night

Yesterday, in a periodic repeat of what he says every 6 or so months, Jamie Dimon - devoid of other things to worry about - warned once again about the dangers hidden within the shadow banking system (the last time he warned about the exact same thing was in April of this year). The throat cancer patient and JPM CEO was speaking at the Institute of International Finance membership meeting in Washington, D.C., and delivered a mostly upbeat message: in fact when he said that the industry was "very close to resolving too big to fail" we couldn't help but wonder if JPM would spin off Chase or Bear Stearns first. However, when he was asked what keeps him up at night, he said non-bank lending poses a danger "because no one is paying attention to it." He said the system is "huge" and "growing."

Dimon is right that the problem is huge and growing: according to the IMF which just two days earlier released an exhaustive report on the topic, shadow banking (which does not include the $600 trillion in notional mostly interest rate swap derivatives) amounts to over $70 trillion globally.

What he is very much wrong about is that nobody is paying attention to shadow banking: Zero Hedge has been covering the topic since early 2009.

Which is why we urge anyone who is curious to catch up on the issues surrounding non-bank lending, to read our 1,000+ articles on the topic.

However, for those who are time-strapped, here is a recent take from Bloomberg summarizing the IMF's 192-page report on Shadow Banking released last wee titled "Risk Taking, Liquidity, and Shadow Banking."

In a summary of the report, the IMF estimated the shadow banking industry at $15 trillion to $25 trillion in the U.S.; $13.5 trillion to $22.5 trillion in the euro area; $2.5 trillion to $6 trillion in Japan; and about $7 trillion in emerging markets.


Not included in the summary were estimates of the size of shadow banking in countries including the U.K., and Gelos said later at a press conference said the industry globally exceeds $70 trillion, citing figures from the Financial Stability Board.

One can see why Dimon is concerned.

“Shadow banking can play a beneficial role as a complement to traditional banking by expanding access to credit or by supporting market liquidity, maturity transformation and risk sharing,” the IMF said in the report. “It often, however, comes with bank-like risks, as seen during the 2007-08 global financial crisis.”


The report urges policy makers to address shadow banks with “a more encompassing approach to regulation and supervision that focuses both on activities and on entities and places greater emphasis on systemic risk.”


“Shadow banking tends to take off when strict banking regulations are in place, which leads to circumvention of regulations,” Gaston Gelos, chief of the IMF’s global financial analysis division, said in a statement accompanying portions released today of its Global Financial Stability Report. The full report is scheduled to be released Oct. 8.


Non-traditional lending “also grows when real interest rates and yield spreads are low and investors are searching for higher returns, and when there is a large institutional demand for ‘safe assets’” such as insurance companies and pension funds, he said.


Shadow banks include money-market mutual funds, hedge funds, finance companies and broker-dealers. They pose a risk to the broader financial system because they rely on short-term funding, “which can lead to forced asset sales and downward price spirals when investors want their money back at short notice.”

Below are the main findings reported by the IMF regardign shadow banking. Note: those following our periodic updates on the state of the US and global shadow banking system know all of this.

  • Although shadow banking takes different forms around the world, the drivers of shadow banking growth are fundamentally very similar: shadow banking tends to flourish when tight bank regulations combine with ample liquidity and when it serves to facilitate the development of the rest of the financial system. The current financial environment in advanced economies remains conducive to further growth in shadow banking activities.
  • Most broad estimates point to a recent pickup in shadow banking activity in the euro area, the United States, and the United Kingdom, while narrower estimates point to stagnation. Whereas activities such as securitization have seen a decline, traditionally less risky entities such as investment funds have been expanding strongly.
  • In emerging market economies, shadow banking continues to grow strongly, outstripping banking sector growth. To some extent, this is a natural byproduct of the deepening of financial markets, with a concomitant rise in pension, sovereign wealth, and insurance funds.
  • So far, the (imperfectly) measurable contribution of shadow banking to systemic risk in the financial system is substantial in the United States but remains modest in the United Kingdom and the euro area. In the United States, the risk contributions of shadow banking activities have been rising, but remain slightly below precrisis levels. Our evidence also suggests the presence of significant cross-border effects of shadow banking in advanced economies. In emerging market economies, the growth of shadow banking in China stands out.
  • In general, however, assessing risks associated with recent developments in shadow banking remains difficult, largely because of a lack of detailed data. It is not clear whether the shift of some activities (such as lending to firms) from traditional banking to the nonbank sector will lead to a rise or reduction in overall systemic risk. There are, however, indications that, as a result, market and liquidity risks have risen in advanced economies.
  • Overall, the continued expansion of finance outside the regulatory perimeter calls for a more encompassing approach to regulation and supervision that combines a focus on both activities and entities and places greater emphasis on systemic risk and improved transparency. A number of regulatory reforms currently under development try to address some of these concerns. This chapter advocates a macroprudential approach and lays out a concrete framework for collaboration and task sharing among microprudential, macroprudential, and business conduct regulators

The main risks surrounding shadow banking per the IMF:

  • Run risk: Since shadow banks perform credit intermediation, they are subject to a number of bank-like sources of risk, including run risk, stemming from credit exposures on the asset side combined with high leverage on the liability side, and liquidity and maturity mismatches between assets and liabilities. However, these risks are usually greater at shadow banks because they have no formal official sector liquidity backstops and are not subject to bank-like prudential standards and supervision (see Adrian 2014 for a review).
  • Agency problems: The separation of financial intermediation activities across multiple institutions in the more complex shadow banking systems tends to aggravate underlying agency problems (Adrian, Ashcraft, and Cetorelli 2013).
  • Opacity and complexity: These constitute vulnerabilities, since during periods of stress, investors tend to retrench and flee to quality and transparency (Caballero and Simsek 2009).
  • Leverage and procyclicality: When asset prices are buoyant and margins on secured financing are low, shadow banking facilitates high leverage. In periods of stress, the value of collateral securities falls and margins increase, leading potentially to abrupt deleveraging and margin spirals (FSB 2013b; Brunnermeier and Pedersen 2009).
  • Spillovers: Stress in the shadow banking system may be transmitted to the rest of the financial system through ownership linkages, a flight to quality, and fire sales in the event of runs (see Box 2.1 and the section “Systemic Risk and Distress Dependence”). In good times, shadow banks also may contribute substantially to asset price bubbles because, as less regulated entities, they are more able to engage in highly leveraged or otherwise risky financial activities (Pozsar and others 2013).

And for the visual learners, here is the chart breakdown:

Much more in the usual place