Shadow banking, as an economic phenomenon of recent years, should be viewed primarily in the context of changing economic conditions. Today, a new global macro position is a post-crisis pause of rapid growth of the world economy, the consequence of which is fixed to the long time the situation of general uncertainty in the economy. In the context of the changing global macroeconomic conditions, the problem of shadow banking and its regulation is relevant. The topic deserves close attention from the perspective of scientific and practical understanding of this phenomenon. Shadow banking is a financial market segment, operating outside official control and supervision of banking regulators, including central banks. The term appeared in the United States and originally meant any weakly regulated or completely beyond the control of the Fed’s organization (Krugman, Obstfeld and Melitz 2014).
Shadow Banking in China
According to many economic experts from around the world, today the Chinese economy is one of the most active in terms of the development pace. Indeed, just a few decades the Chinese have done the impossible – from a backward agrarian country it has become a global industrial center. However, experts usually add that what we see now is not the limit of the Chinese. They may be much larger. And the only thing holding them back is a huge scale corruption and shadow business (Liansheng 2015).
Occurred all over the world in 2008, the economic crisis made it possible for Chinese households to stash a profit of 1.4 trillion US dollars. This amount is equivalent to 30% of the Chinese economy. Analysts argue that this fact had a negative impact on revenues of the simple average Chinese, who could then create another 4,726 dollars. As experts assert, the shadow of China’s economy continues to exist mainly due to bribery in the implementation of socially important projects. Mostly it concerns the agreements which are directly related to the acquisition of land or different kinds of real estate. Corrupt deals are usually concluded by party bosses or families of officials. According to official statistics, a lot of heads of government agencies at various levels have multiple bank accounts, but at the same time, material well-being of their children is much higher (Hsu and Li 2015).
The Chinese population more and more loudly expresses its undisguised outrage of growing wealth of heirs of the Communist Party members, according to the investigation of the Chinese news agency Xinhua. In addition, 92% of respondents strongly believe that all of the richest families in China have a rich political past, as the survey by People’s Daily newspaper shows among the local population (Hsu and Li 2015).
In China, there is also a “shadow banking” in the narrow sense it is frankly illegal activities (money laundering and other maintenance operations of shadow economy, the withdrawal of money abroad, bypassing state control over cross-border capital flow and others). Moreover, both informal lenders and conventional banks can be engaged in such activities. For the “white” banks it is often about off-balance, or clandestine operations, which they hide from the People’s Bank of China and the Commission on banking regulation (Liansheng 2015).
“Shadow banking” became the real headache for the party and state leadership of China. More than 3,350 shady banks operate in 120 cities of China. They include from 120 to 150 thousand employees, profits from illegal turnover of money in these banks varies from 4% to 15%. Underground Chinese banks have close ties with the state-owned banks and foreign financial institutions, and even directly subordinate to them (Hsu and Li 2015).
Thus, today, the Chinese authorities see that trusts and other non-bank structures transformed from a factor of economic growth in the economic destabilization factor and attempting to limit the “shadow banking”. So far, China’s government achievements in this area are more than modest. Shadow banking by inertia continues to inflate the “bubble” in the Chinese real estate market. Collapse, “bubble”, may lead to the fact that the Chinese economy for the first time in decades can go into the negative zone of growth and become the detonator of the global crisis. For better serving Chinese total debt, which at the end of the current year will close to the bar of 300% of GDP, according to rating agency Fitch analysts, GDP growth of 15% is required, rather than the current official 7% (Liansheng 2015).
Shadow Banking in America
The highest increase in activity of shadow banking was demonstrated by the USA. At the peak of activity in 2007, the shadow banking was estimated at 16 trillion dollars. It was about 50 trillion dollars in the world against 10 trillion dollars in the banking system. There are three financial structural paradigms prevailing in the modern world, the American “shadow banking system”, the German “lending by banks deposits” and the Arabic “central planning”. The criterion of division is the share of banks and their relationship with the non-bank financial institutions and central banks in different countries. Shadow banking system is a system of the USA, the UK, and the Netherlands, where the share of non-bank financial institutions is above 20%, and in some cases higher than that of banks (Krugman, Obstfeld and Melitz 2014).
In recent years, the companies that provide services to the shadow banking began to increase their presence in the stronghold of the global banking empire – the United States. According to the Financial Times, 53% of all home loans in the US in April 2015 are the money of shadow banking. And not really hiding, the largest share in a financial transaction belongs to a credit line the company Quicken Loans. The annual turnover of the company is $70 billion. After it, in terms of volume, such financial institutions as PHH, loanDepot.com and many others follow.
Canadian shadow banking system is principally independent, and the jeopardy is reasonably minor on both a temporary and longstanding basis. In case there is a risk, it probable relates to the National Housing Act mortgage-backed securities (NHA MBS) segment, which is connected with the wider subject concerning household debt. Intrinsically, there is the probability of a tail-danger occasion in the housing segment causing losses in lender mortgage portfolios and, hypothetically, to insurers and the federal government. Nevertheless, there should be appropriate protections to restrict the downside risk. Thus, Figure 1 shows that flow of funds in Canadian shadow banking is much lower than of the USA (TD Economics 2015).
Figure 1. Flow of Funds in the Global Shadow Banking
Works Cited
“A Checkered Landscape: A Global View of the Risk of Shadow Banking.” TD Economics. 2015. Web. 19 February 2016.
Hsu, Sara and Li, Jianjun. “The Rise and Fall of Shadow Banking in China.” Political Economy Research Institute. 2015. Web. 19 February 2016.
Krugman, Paul, Obstfeld, Maurice and Melitz, Marc. International Economics: Theory and Policy (10th edition). Upper Saddle River: Prentice Hall. 2014. Print.
Liansheng, Zheng. “The Shadow Banking System of China and International Regulatory Cooperation.” New Thinking and the New G20 Series. 2015. Web. 19 February 2016.
