Everything you need to know about Shadow Banks

In the last few years, access to bank funding has become harder to obtain. As a result, some have started to lean towards alternative measures such as engaging with unregulated or unregistered lenders. With the prices rising rapidly in the property market, for those that are desperate to snatch a home at any cost this may seem like a great idea, however, there is a dark side towards using alternative unregulated lenders.

The term “Shadow Bank” was originally coined in the United States, around the time of the last Global Financial Crisis. It was a word to describe the high-risk mortgage-backed security structures set up by banks to offset any unwanted loans from their balance sheets. These high-risk loans were then repackaged as highly rated investment bonds, even though most of the underlying assets in these loans were insolvent.

Since the early days of the Global Financial Crisis, Shadow Banking has now evolved into a term that is frequently used to broadly describe and cover all financial negotiations that offer bank-like lending services and activities. The difference when comparing it with a regulated and registered bank, however, is that these shadow banks / alternative lenders don’t have any where near the same reporting obligations as the authorised institutes.

Much like traditional banking, shadow banking involves structuring loans around maturities and liquidity and the usage of leverage. The loan interest rates advertised by these Shadow Banks are often also very competitive with those charged by mainstream traditional banks.

According to the Financial Stability Board, it has been estimated that as of March 2018, non-banking financing stands at around $160 trillion US dollars globally. Particularly in some countries, the amount has gotten so high, it has caused a great deal of concern for the Government. In Australia alone, Shadow Banking makes up about 7 per cent our total financial system assets, totalling in approximately $500 billion Australian dollars.

While the sum in Australia that has been racked up by Shadow Bankers isn’t enough up cause financial instability in our country, many experts are concerned for countries where the sum is high (such as China, Canada and the UK) that it can cause instability and possibly another Global Financial Crisis if it continues to spiral out of control.

In summary, the best way to take out a loan is to go through regulated and registered means via traditional banks. Your accountant or financial planner may be able to give you better advice in this area.

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