Shadow banking sector (parallel banking sector; extra-legal banking sector, underground banking sector)

Legally established and properly constituted companies which, although they are not banks, nevertheless conduct conventional financial transactions peculiar to banks on an ongoing or even occasional basis, primarily by raising funds and granting them as loans, or by channeling them into companies threatened with insolvency and thus engaging in credit intermediation, i.e. participating in the granting of loans. – Such entities include, above all, hedge funds, private equity funds, vulture funds and structured investment vehicles. In the USA, the public mortgage lenders Federal National Mortgage Association (FNMA, usually called “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC, usually called “Freddie Mac”) are also assigned to the shadow banking sector in this sense. In the subprime crisis, it came to light that these companies represent a high risk factor for the global financial system due to their connection to systemically important institutions. – However, the frequently encountered criminalization and demonization of shadow banks in the defined sense is unfounded. It may well be advantageous for all parties involved if certain transactions are not carried out by banks but by specialized companies that are also better able to manage the associated risks. – But because, as the financial crisis has shown, shadow banks in this definition can very easily pose systemic risks, it is perfectly reasonable for supervisory authorities to monitor them. – It is estimated that the global shadow banking market has grown from $45 trillion in 2002 to $74 trillion in 2013. – Conduits, special purpose vehicles, structured investment vehicles, and special purpose entities managed off the balance sheets of institutions. In many cases, their creation was intended to circumvent unlawful regulatory requirements, especially with regard to capital adequacy. In the process, an extraordinarily high level of risk was built up here outside the field of vision of the supervisory authorities, the full significance of which only became apparent in the course of the financial crisis that followed the subprime crisis. Many banks were now suddenly forced out of
For reputational issues, the Group had to take the previously outsourced risks onto its balance sheet. This contributed significantly to the worsening of their equity base and to the tightening of their liquidity situation. As a result, the G20 ministers and central bank governors decided to subject these companies to the Basel II framework by the end of 2011. – In addition to licensed institutions supervised by the supervisory authorities, there are companies operating unauthorized, illegal money transactions of all kinds. In Germany, there is a widespread group of such companies. The deposits are often made by people of foreign origin living here. According to findings by the Federal Financial Supervisory Authority, the shadow banking sector in this sense is also frequently used for money laundering. In addition, that black market is also an ideal transshipment point for counterfeit and falsified securities and counterfeit cards. – The proportion of fraudulent activities on the part of the service providers is extremely high in this area; however, for various reasons, prosecution (satisfactory prosecution) is almost hopeless. Enablers therefore offer to look for persons (avenging angels) who will bring back lost money, at least in part. – In March 2012, the EU Commission presented a Green Paper on shadow banking. It defines shadow banking as a “system of credit intermediation involving entities and activities outside the regular banking system” and lists it in more detail. – See Address Spoofing, Banking Regulation Paradox, Blind Pool, Cash Pooling, Daimonion, Steam Room, Domicile Concealment, Confiscation, Financial Vulture, Financial System, Corporate Undertaker, Secret Tip, Money Transfer Intermediary, Ghetto Banking, Grudge Effect, Identity Theft, International Business Company, Internet Offerings, Hawala, High risk countries, Capital Market, Gray,
Non-bank, nominee, Obristen-Darlehn, offshore financial centers, parallel banking, peer-to-peer lending, avenging angels, regulatory arbitrage, regulatory pressure, remittance services, yield chasing, shadow banking regulation, underground banking, tangibility, angle broker, twenty-two credit. – Cf. BaFin’s 2003 Annual Report, pp. 71 ff, BaFin’s 2004 Annual Report, pp. 83 ff. and the respective BaFin Annual Report (section on “Permit Requirement and Prosecution of Illicitly Conducted Transactions”), Financial Stability Report 2010, p. 127 (leveraged products offered in the shadow banking sector give rise to high risks), Financial Stability Report 2011, p. 74 (supervision and regulation; recommendations of the Financial Stability Board), BaFin’s 2011 Annual Report, pp. 56 et seq. (definitional issues; international regulatory efforts), Financial Stability Report 2012, p. 67 et seq. (detailed account of shadow banking; many overviews; references); p. 75 et seq. (foreign shadow banks turn out in part to be business units set up by German institutions abroad; risks). ECB Monthly Report of February 2013, pp. 99 ff. (on monitoring the shadow banking sector; delimitation issues; role of the Financial Stability Board; many overviews); BaFin Annual Report 2012, pp. 13 ff. (regulatory efforts at the international level), pp. 51 ff. (enumeration of regulatory measures); Deutsche Bundesbank Monthly Report of March 2014, pp. 15 ff. (detailed account; overviews; references).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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