Bank Bashers Will Regret Their Zeal

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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Banks are taking a beating from every quarter. They are fined billions of dollars by national and international regulators because their traders manipulated this or that market indicator. They are slapped with hundreds of millions of dollars in penalties for deceptive practices in selling insurance. They are told to delever, pressured to cut bonuses and cap salaries.

In short, banks are in retreat. The question is whether the zealous bank-bashers will like the alternative.

In its recently issued Global Shadow Banking Monitoring Report for 2013, the Financial Stability Board, an international advisory body, estimates the end-2012 assets of non-bank financial intermediaries at 117 percent global output, up from 111 percent in 2011. These assets grew 8.1 percent in 2012, while bank assets remained stable because the effect of growing valuations was offset by shrinking balance sheets.

The institutions that the FSB calls "other financial intermediaries" include equity, fixed income, money market and hedge funds, broker dealers, structured finance vehicles, real estate trusts and funds -- entities that do not receive the regulatory attention enjoyed, or rather suffered, by banks. The FSB's assessment of their growth is intentionally conservative, and the international body admits that some trends, such as the growing role of non-banks in direct lending to businesses, cannot be quantified at all.

According to the FSB report, non-bank institutions "have recently initiated or stepped up their lending activities in some jurisdictions in order to fill the void left by banks or get access to higher yielding exposures. At the riskiest end of lending activities, leveraged loans, of which a sizeable proportion is syndicated to non-banks, have also experienced buoyant activity since 2012."

The business opportunity for non-banks to go into, well, banking is especially obvious in Europe. Accordingto asset management company Alcentra, banks handle 75 percent of corporate financing in Europe, compared with only 30 percent in the U.S. This year, companies from the European periphery, denied their traditional funding source as banks grow more risk-averse, are setting recordson the bond market: Greek firms alone have raised $5.4 billion. Unfortunately, this option is available only to bigger firms. Small and medium-sized enterprises, which employ 72 percent of the workforce in Europe, are forced to find alternative solutions.

Regulators seem to like the phenomenon. In the U.K., non-bank lenders are actually invited to co-finance small business with the government. The idea is that funds and insurance companies are often less levered than banks, so why not tap them for some liquidity for cash-starved businesses?

Problem is, nobody knows how much the non-banks are actually lending. "As direct lending markets are by nature private, information is scarce and patchy," the FSB notes. And while insurers' lending activities are not particularly risky because of their high capital levels, unregulated funds engage in the kind of loose lending that banks are now conditioned to avoid. Those same insurance companies can take on these risks indirectly by investing in the funds.

The FSB believes that non-bank lending represents only a small share of financing made available to companies, but because the activity is not systematically monitored, it can grow fast without attracting attention.

There is no question that banks have to exercise caution and clean up their practices, but incessant regulatory pressure on them is creating a void in the market that more adventurous players will fill. If the chase for yields ends as badly for them as it did for banks in 2008, governments might find the mess much harder to clean up, because they will know too little about it.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Leonid Bershidsky at