Sometimes, looking at your past work reveals not only the progression of a real-world trend but also a subtle shift in the narrative of the topic under discussion.

It used to be that the ‘shadow banking system’ encompassed a relatively select group of non-bank financial intermediaries – broker-dealers, the repo market, money market funds, SIVs, etc. That group grew enormously in the years before the financial crisis, but has since collapsed pretty significantly.

Nowadays the definition of shadow banks appears to have expanded to include a host of non-bank financiers like direct lenders, asset managers, hedge funds etc.

Here’s a selection of some shadow banking pieces that illustrates the trend.

 

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The collateral crunch – FT Alphaville, June 2011
A post on the classical definition of shadow banking: “It gets less attention than its credit-denominated relative, but the 2008 financial crisis actually sprung from a massive ‘collateral crunch’ within the shadow banking system.”

Banks share risks with investors – FT, October 2011
This was one of the first stories on the so-called “reg-cap” trades banks were striking with buy-side entities like hedge funds, insurance companies and pension funds, as they desperately sought to cut down on their capital.

Traditional lenders shiver as shadow banking grows – FT, January 2012
Here’s where the definitions begin to get muddled. ‘Old-school’ shadow banking had fallen off a cliff since 2008, but new-school shadow banking as defined by the Financial Stability Board was starting to take off.

Nothing screams shadow banking quite like a leveraged loan ETF – FT Alphaville, August 2013
Indeed, nothing does. To quote from the post: “Definitions of shadow banking are notoriously nebulous, but you could easily say (as the Financial Stability Board did last year) that any vehicle providing credit and leverage, and which falls outside the realm of traditional regulated banking, fits the bill. In which case, leveraged loan ETFs tick all the boxes plus one other – the promise of liquidity transformation through sunshine and rainy days.”

Fed probes banks’ exposure to mortgage vehicles – FT, October 2013
Regulators have a problem – they can’t yet directly control big chunks of the new-ish shadow banking system – such as mortgage vehicles known as Reits. Instead they exert control over Reit growth through the banks themselves.

Shadow banks reap Fed rate reward – FT, November 2013
A more accurate title might have been some shadow banks reap Fed rate reward. As discussed previously, traditional shadow banks have shrunk but some others – BDCs, Reits, specialty non-bank lenders, etc. – have grown pretty significantly thanks to a combination of low interest rates, yield starved investors and new bank rules.

Competition for banking business lurks in the shadows – FT, January 2014
This is one of the most interesting aspects of shadow banking, in my humble opinion: will the banks react to heightened competition from non-bank lenders and investors, and if so, how? We’ve yet to see this play out though there are rumblings of looser loan underwriting standards already. You can read about that here, here or below.

Wells Fargo bans staff from investing in P2P loans – FT, January 2014
If you can’t join them, beat them I guess? Peer-to-peer lenders seek to extend credit directly between borrowers and lenders, cutting out one of the most traditional functions of banks.

Shadow banks step out to fund mid-market corporate America – FT, February 2014
Fun fact: “More than a quarter of the loans extended last year to middle-market US companies – the beating heart of corporate America – were issued by shadow banks that fall outside the realm of traditional finance.” The flip-side is that the proportion of middle-market loans being made by traditional banks is now at historic lows.

Fed opens its doors to wider repo trading – FT, March 2014
As part of its exit from unconventional monetary policy, the Fed has started a new reverse repo facility. As the article notes: “The growing presence of the Fed, at the expense of established ‘dealer-banks’, is a stark shift for the repo market, where banks have historically pawned out their assets to lenders including money market funds, insurers and mutual funds, in exchange for short-term financing.” The repo market has fundamentally changed.

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So that, I think, is where we are at today. The shadow banking of old is a shadow (ahem) of what it once was, thanks to the combined effects of the financial crisis and the actions of central banks and regulators around the world.

Where shadow banks used to create billions of dollars worth of short-term money-like instruments much of that role is now fulfilled by governments issuing much more short-term debt and floating rate notes. In the US, the Federal Reserve is even stepping in to control a big chunk of the repo market. We’re now left with buy-side players and non-bank lenders/investors who appear to be growing larger and more powerful.