Since the financial crisis, annual growth in global cross-border bank claims have averaged zero.
But now, it’s running at 6 per cent. The Bank for International Settlements’ latest statistical release, out today, breaks it down as follows.
The blue line — banks lending to other banks across borders — is not the biggest driver of this rate of growth. Instead, as the title of the chart implies, it is being fuelled by lending to non-bank financial institutions, which the BIS defines as “entities such as insurance companies, pension funds, hedge funds and money market funds”.
Non-bank financial activity — often referred to under the slightly pejorative term “shadow banking” — is one of the most important consequences of the crisis. So far, it has provided an early glimpse of a world where regulated banks wield less control over money, and what is done with it.
In developed countries the trend is closely linked to the regulatory and structural pressures on banks post-crisis, leading to opportunities for alternative players (especially private equity firms that often employ ex-investment bankers) to deploy capital in their stead.
It is most widely-discussed in the US. Tangible examples of non-banks doing banklike things elsewhere include Dutch pension funds moving into mortgage lending, and investment funds lending directly to companies, rather than buying their publicly traded bonds. Because the field of non-bank activity is so broad and comprises so many potential lines of business, it is extremely difficult to collate, or document collectively.
It is nonetheless growing rapidly — total lending to non-bank financial institutions rose by $172bn in the past year, and now stands at $7tn. It is also coming from banks in regions starved of yield. From the BIS release again:
The latest increase in lending to NBFIs is part of a longer trend. Over the past five years, cross-border claims on that sector have grown at an average annual pace of 7% (compared with 1% for claims on all sectors), reaching $7 trillion at mid-2019. The BIS consolidated banking statistics (CBS) reveal that the surge in lending to NBFIs over the past few years was mainly driven by Canadian, French, Japanese, UK and US banks
Where did the growth go? Most of it went to a few financial centres: the Cayman Islands ($37 billion), the United Kingdom ($34 billion) and Luxembourg ($24 billion).
At least two of these, if not three, are opaque locations. The BIS doesn’t go into granular detail on the particular recipients of that $7tn, and how those funds are deployed (i.e., it doesn’t necessarily support the loose notion that non-banks are taking funds from banks and using them to do what banks might otherwise have done).
At a very high level, it at least implies that economic activity — and especially globally mobile activity — is being driven to a greater extent by players outside of, albeit funded by, banks. Any further speculation is welcome in the comments.
Related links:
Non-banks shake up Dutch mortgages – Financial Times
Blackstone’s €1.5bn offer shows growing threat to Wall St banks – Financial Times