Shadow Banking Implies Ominous Final Outcome
Last we I talked about Liar Loans this week it's Shadow Banking. Both phrases imply seedy and dubious activities in the financial markets but shadow banking potentially foreshadows financial upheaval on a massive scale. What is “Shadow Banking”?
“According to the Bank of Canada, Canadian shadow bankers primarily engage in certain types of investment funds, repurchase agreements, mortgage and consumer finance, private-label securitization, and investment deals not owned by traditional banks. Covering that much ground, it’s not surprising that they often have strong relationships with large banks.”
Basically, Shadow banks operate outside the jurisdiction of the BoC and the Bank Act which means
all the BoC can do is watch from the sidelines.
Some pundits claim that there is no end in sight to the escalating real estate prices in Canada's major cities like Vancouver and Toronto due to the historically low interests and a relatively weak CDN$ which are fuelling this crazy real estate speculation. These seemingly benign facts ignore the physical and historical reality of the cyclical nature of all things whether natural or man made. Nothing stays on a upward trend forever, nothing stays the same forever, simply not possible! Things will eventually correct, the degree of the correction is the unknown variable.
Back to shadow banking. According to best estimates the industry has liabilities of around $1.1 trillion here in Canada as compared to the $2.1 trillion in liabilities of traditional Canadian BIG banks. Projections are that the demand for alternative financing or shadow bankers is going to continue to increase in the foreseeable future. It gets better, apparently Canada's shadow banking is 5x larger per capita than in China which is often cited as an example of unscrupulous lending run amuck: then where does that leave us? So we have a relatively unregulated financing sector often lending to people who could not qualify for a mortgage by traditional means, and this is going to end well? Common sense tells us otherwise.
Questions have to be asked of the BoC and the BIG Banks: Who or what purpose are these low interest rates really serving? If the Big Banks can't provide financing to borrowers under the present conditions, are their lending requirements out of touch with reality? Or, do the BIG Banks see what's coming and prefer to let these shadow banks eventually take to fall and then move in and capitalize on a distressed market? Time will tell ~ as always!
Partial Source: Better Dwelling, April 20, 2017.