CPT Markets Market Analysis: Exposing Wall's Investment Instruments for Global Financial Control! Accurately dismantle the risks of shadow banking!
Bank of England Governor Mark Carney has warned the market that the large, rapidly expanding shadow banking is the most worrying financial threat to global markets, and CPT Markets analysts have also warned investors to take the shadow banking issue seriously, as it is considered one of the main culprits of the 2008 financial tsunami.
In short, shadow banking is a bank-like financial institution, and although it can provide services such as loans like banks, the difference between the two is that shadow banking is not subject to any strict legal regulation. In order to make readers more understanding, CPT Markets analysts especially explained that when the public or enterprises have capital needs, they often borrow from banks through normal channels, but in order to effectively control risks and maintain financial order, the bank's business needs to be strictly supervised by competent authorities such as ** banks, and reflected in the financial statements.
If investors want to avoid being bound by the law, they can raise funds through first-class methods, such as: investment banks, insurance companies and investment trust companies of non-bank financial institutions, and even private lending institutions. It is conceivable that through these ingenious design of financial products, funds can be freely circulated between supply and demand, thus constituting a shadow banking system, also known as a parallel banking system.
If we take the Bank for International Settlements (BIS) data, the amount of money that shadow banking can control has already reached 226 in 20216 trillion US dollars, accounting for nearly half of the world's financial assets, is enough to show that shadow banking plays a very important role in the financial markets of various countries. However, it can also be seen that shadow banking has already quietly established huge hidden leverage, bringing fatal hidden risks to the market.
In the shadow banking system, the financial instruments used by the participants in the transaction are to convert long-term and illiquid assets into short-term and liquid liabilities. Typically, shadow banks will take mortgage loans from commercial banks and then issue ABSs to investors or CDOs based on such assets, which in turn will further issue CDOs based on such assets, but the key to this process is often to rely on reliable credit ratings and the backing of CDS instruments. Most importantly, the overall process involves two maturity transitions, liquidity and asset conversions, which allow credit risk to be hidden.
CPT Markets analysts stressed that while shadow banking has advantages in providing maturity switching and sharing the corresponding risks, readers should be aware that risks such as its highly leveraged operation model and maturity mismatch are also non-negligible considerations, and it is worth mentioning that the operation of credit and maturity switching may lead to the formation of asset bubbles in the real estate market, which in turn will lead to a financial crisis. In general, in the whole transmission process, the hidden risks in each link have a magnifying effect.
So what are the risks of unregulated shadow banking to the entire financial system? CPT Markets analysts have compiled as follows:
Without proper regulation of capital reserves and liquidity, problems can lead to systemic risks.
Lack of deposit protection provided by traditional banks.
In the event of a liquidity crisis, shadow banks are unable to access much-needed loans from ** banks.
Shadow banking has the potential to over-lend and trigger a recession.
While some may view unregulated shadow banking as a debt risk in times of crisis in financial markets, CPT Markets analysts stress that there is absolutely a justification for any demand. Because from another point of view, it may be precisely because the traditional financial system is unable to meet the capital needs of the private sector due to its own security supervision and other reasons, which has led many enterprises to engage in bank-like financial business to fill the demand gap and obtain profits. From the above, we can understand that although shadow banking is relatively alienated from the general public, a proper understanding of such a system can help us to better understand the overall economic system.