Consciousness of Sheep
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The digital economy has largely been welcomed as a “disruptive force,” obliging old fashioned businesses to compete for custom with new lean internet companies like Uber and Google. But disruptive businesses in banking may not be the positive development intended. As Leonid Bershidsky at Bloomberg points out:
“In a rivalry between regulated and unregulated firms, the latter have an unfair advantage. It also applies to banks, which spent the past ten years losing market share to companies that regulators ignored.”
The crash of 2008 was in large part the result of an out of control shadow banking sector trading in dodgy derivatives like (sub-prime) mortgage backed securities. The credit crunch occurred when banks discovered that they had bought far too many of these worthless pieces of paper.
Following 2008, the banks bore the brunt of public outrage and additional state regulation. However, neither the public nor politicians have been concerned with the (much larger) shadow (i.e. unregulated) banking sector:
“The reason shadow banks have largely escaped public scorn, regulatory scrutiny and high capital requirements is that they often came in the guise of high-tech disruptors. Quicken Loans Inc., the third biggest mortgage lender in the U.S. in 2015, does business online and on the phone, and that somehow makes it less interesting to regulators than a bank that does the same through an old-style branch network. Lending Club and other “peer-to-peer” lending firms quickly became conduits for large investors, not “peers,” yet they avoided regulation as though they were innovative tech platforms.”
Bershidsky’s concern is that the playing field should at least be levelled:
“It’s probably unrealistic to expect major easing of banks’ regulatory burden. Governments, however, could level the playing field by deciding that any lender is a bank and imposing the same tough rules on all of them. Regulatory arbitrage is inherently unfair, and it’s unclear why firms that claim a technological advantage should be given additional preferences.”
For the rest of us the problem may be much greater. In 2014 the shadow banking sector had assets of $80 trillion – nearly a quarter of global financial assets. Three years on that figure is likely to have grown. What that amounts to is an unregulated sector that is big enough to take the entire global economy down with it when the next financial crisis arrives.
