Arab Press

بالشعب و للشعب
Tuesday, May 13, 2025

Here’s where the next financial crisis starts

Here’s where the next financial crisis starts

There are ‘accidents’ waiting to happen. How to stop them isn’t altogether clear.

It couldn't happen again. Could it?

When banks blew up the global economy in 2008, regulators from Brussels to Washington scrambled to put up the scaffolding. That was all well and good, but what about the parts of the financial system that were left behind? A few ripples under the surface are now causing insiders to break out in a cold sweat.

Alarm bells are ringing about so-called shadow banks or nonbanks — not banks in the traditional sense at all, but structures such as investment funds, insurers, private equity, pension and hedge funds. Not only did they escape some of the stricter rules imposed during the last crisis but they also benefited by taking on a lot of the risks from the ordinary bank sector.

But the post-crisis good times are coming to an end. Central banks are increasing interest rates in an effort to tackle soaring inflation meaning the era of cheap money is over.

And regulators fear the vulnerabilities that have built up over the past few years are ready to explode and send shockwaves across the world.


Ominous playbook


The dwindling supply of money in the shadow banking system means "you see some of the issues that are there — being exposed," warned Verena Ross, the chief of the EU’s securities regulator, in an exclusive interview with POLITICO.

It's not difficult to see what might happen, and how. So far a series of mini-crises — relatively small and self-contained — means there's a clear and ominous playbook for how a problem in shadow banking starts, and then spreads:

— The prime example is the turmoil that hit U.K. pension funds in the fall, with the Bank of England having to step in to buy bonds to calm markets.

— Similarly, volatile price swings in futures markets sparked by Russia’s invasion of Ukraine created a cash crunch at European energy companies.

— At the start of the pandemic, a “dash for cash” by companies created problems in short-term debt markets — again requiring a central bank intervention.

— And in 2021, the collapse of the Archegos hedge fund spread losses on large hidden bets to banks.

The same themes run through all those wobbles: short-term cash pressures, risky bets and domino effects.


Further risks


“What you see in all these [peripheral] episodes is that there’s a common issue around … liquidity, leverage and interconnectedness," Ross said. And these are "common indicators of issues that we need to look at, to identify where potential further risks might be coming from."

It's not just the securities regulator. Other watchdogs are sounding similar warnings about how shadow banks could accentuate a crisis.

A change in financial market conditions could lead to short-term cash stress and trigger forced selling, Jérôme Reboul, managing director of the regulatory policy and international affairs directorate at the French Autorité des Marchés Financiers (AMF), said.

That could create a “self-reinforcing mechanism” where selling drives prices down further, creating more pressure on investors — or more cash demands through margin calls on derivatives positions. “That’s the episode that everybody has in mind,” he said.

But while almost everyone agrees the shadow banking sector might be an accident waiting to happen, there isn't a clear or agreed plan for how to stop it.


What to do


Global authorities want to make shadow banks more resilient to prevent a cash crunch mutating into a full-blown crisis. Central bankers are pushing for action because they might otherwise have to pump in public money to calm things down — at a time when they’re eager to do the opposite: step back from markets.

There’s a divide over how far to go. While central banks want to transfer similar safeguards already in existence in the banking system — such as cash buffers — over to the shadow banking sector, markets regulators prefer more bespoke options.

As Ross said, it's not the case that one size fits all.

“It is to my mind not necessarily the right approach to just say because we have measure X in the banking sector or measure Y in the insurance sector, you should have the same necessarily in another sector," she said. "You need to look at what actually makes sense in the individual area and sector that you are dealing with."

Still, there is common ground over the need to firm up what tools are available in a crisis — like penalizing investors rushing to get their cash back quickly — and preferably before something else goes pop.


We're not banks


For its part, the fund industry is fiercely resistant to any reforms that would force them to hold buffers like banks, and is wary of being lumped together with other parts of the shadow bank sector.

But even it recognizes the problem.

“Do I think that there’s a risk of accidents in the nonbank sector broadly? I would say, yes, I do. Any time you have such a lengthy period of stimulative interest rates and stimulative fiscal policy, and then you come out of it, you’re going to see that,” said Michael Pedroni, chief global affairs officer at ICI, which represents the global fund industry.

In the EU, there’s a debate underway over how prescriptive to be on the tools available in a key piece of fund legislation, and to improve data and reporting to the authorities.

“We need to get our house in order in the EU,” said Ross. "On the other hand, we need to be conscious that we live in a global financial system.”

Comments

Oh ya 2 year ago
The government needs to get out of bailing shadow banks and regular banks out. If they fail let the chips land were they be.

Newsletter

Related Articles

Arab Press
0:00
0:00
Close
Trump says it would be 'stupid' not to accept gift of Qatari plane
Quantum Computing Threatens Bitcoin Security
Michael Jordan to Serve as Analyst for NBA Games
Senate Democrats Move to Censure Trump Over Qatar Jet Gift
Hamas Releases Last Living US Hostage from Gaza Amid Ongoing Conflict
India and Pakistan Agreement on Ceasefire Amid Ongoing Tensions
Trump's Upcoming Middle East Trip Excludes Israel, Raising Concerns Among Israeli Officials
Trump's Upcoming Visit to Gulf Nations: Investment and Security at the Forefront
Cardinal Robert Prevost Elected as Pope Leo XIV, Marking a Historic Papacy
India-Pakistan conflict may be first test for Chinese military tech
Common Sense Returns to Britain's Legal System: UK Supreme Court Declares a Woman Is… a Woman
Warren Buffett to Step Down as Berkshire CEO After Nearly 60 Years
Trump Shares AI-Generated Image of Himself as… Pope, Prompting Outrage Reaction
Amazon Launches Satellite Internet Service Amidst Competition with SpaceX
Trump Administration Removes National Security Adviser Mike Waltz Amid Signal Chat Controversy
Massive Explosion at Iran's Bandar Abbas Port Linked to Suspicious Chemical Shipments
Pope Francis Laid to Rest in Rome as World Leaders Attend Funeral
Not Child’s Play: How Competitive Gaming Became a Global Economic Empire
California Surpasses Japan to Become the World’s Fourth-Largest Economy
Former U.S. Congressman George Santos sentenced to eighty-seven months for wide-ranging fraud
Israel Considers Limited Strikes on Iran's Nuclear Facilities Amid Diplomatic Efforts
Saudi Arabia Offers Max Verstappen Unprecedented Deal to Join Aston Martin
Global Pistachio Shortage Amid Rising Demand for 'Dubai Chocolate'
IMF Predicts No Global Recession Amid Trade Tensions
Removing the Political Rival Means Diminishing What's Remaining of Turkey's Economy
White House Investigates Security Breach After Journalist Accidentally Added to Secret Yemen Strike Chat
UAE Pledges $1.4 Trillion Investment Strategy in the United States
Revealing the Electromagnetic Characteristics of the Great Pyramid of Giza
Netanyahu Dismisses Shin Bet Chief Amid 'Loss of Trust' and 'Qatargate' Corruption Investigations Involving Netanyahu's Advisors
U.S. Approves $100 Million Precision Rocket Sale to Saudi Arabia Amid Ongoing Yemen Conflict
High-ranking ISIS Official Neutralized in Collaborative Operation in Iraq
Netanyahu Rejects UN Reports on Gaza as 'Untrue'
Six Americans Freed from Detention in Kuwait
Syria Wraps Up Military Campaign Amid Extensive Violence and Large-Scale Killings.
Trump Speaks Out on the Arrest of Pro-Palestinian Student at Columbia University
Demonstrations Break Out as Individual Ascends Big Ben with Palestinian Flag
Over 300,000 Refugees Expected to Return to Syria Amid Ongoing Crisis
Trump Urges Nuclear Talks with Iran as Tensions Escalate
US Launches AI Initiative to Track Foreign Nationals' Social Media for Terrorist Support.
US Initiates Direct Discussions with Hamas During Hostage Situation
US Government Dismisses Arab Leaders' Plan for Gaza Reconstruction
US Engages in Unprecedented Covert Talks with Hamas Regarding Hostages
Arab Leaders Approve $53 Billion Initiative for Gaza Reconstruction
Iran's Enriched Uranium Stockpile Reaches Levels for Six Nuclear Devices
Israel Indicates Willingness to Resume Military Operations in Gaza
Hamas Lets Go of Last Israeli Hostage as Part of Ceasefire Deal
Trump Adjusts Gaza Resettlement Plan Following Rejections from Regional Leaders
The negotiation teams of Trump and Putin meet directly, establishing the groundwork for a significant advance.
Israeli Minister Urges Hamas to Surrender and Depart from Gaza.
Iran Considers Moving Its Capital Due to Urban Difficulties
×