Shadow banking is about investment and money market funds, and other financial organisations that behave like lenders and have assets of €43 trillion compared to regulated European banks assets of €38 trillion. Photograph: iStock
McCaul is coming to the end of her term on the ECB supervisory board and will leave in November. When she used an interview with the Financial Times last week to warn against the dangers of shadow bankingm we really should sit up and take notice. But we probably won’t. McCaul is talking about investment and money market funds and other financial organisations that behave like lenders and have assets of €43 trillion compared to regulated European banks assets of €38 trillion.
McCaul’s point is a simple one: regulators have no real clarity about the strategies and assumptions that have been made by shadow banks and as a result are in the dark as to both the possibility of one of them falling over and what the consequences might be. At the heart of the run were Dublin-based shadow banks called LDI funds whose customers included UK pension schemes. The LDIs were forced to offload gilts exacerbating the run. Ultimately, the Bank of England was forced to step in and buy £65 billion worth of gilt to prop up the LDI funds and stave off the potential insolvency of some UK pension funds.Complacency is both widespread and unsurprising.