Banks Need to Worry About Shadow Banks
The boom in market-based finance has taken risks away from regulated lenders, but recent crises show they’re still exposed.
Briefly British Prime Minister, Liz Truss moved fast and broke things
Photographer: Chris J. Ratcliffe/Bloomberg
What do Bill Hwang, the disgraced US investor, and Liz Truss, Britain’s shortest-serving prime minister, have in common? They were behind two of the multiple mini-crises in recent years that have gotten investors, bankers and regulators sweating about systemic risks for financial markets and investment funds. What people aren’t talking about enough, however, is the knock-on effect for banks.
Banks are far stronger and more stable than before the 2008 crisis, as I’ve written before. But they remain directly exposed to the market-based version of finance that has ballooned in the past decade. And that exposure can be far more dangerous than expected when a very large fund or group of funds hits big problems fast as highlighted by the collapse of Hwang’s Archegos Capital Management, or the pension fund-driven turmoil in UK government bond markets triggered by Truss’s unfunded tax cuts.