The media tends to portray offshore banking as the ultimate evil in the financial world, but they tend to skip over the fact that there are many unregulated facets in the banking realm. Perhaps the largest of these is found in shadow banking, a group of financial intermediaries in the market who are largely unregulated. It is this group that was perhaps mostly to blame for the expansion of mortgage lending that was seen ahead of the 2008 financial crisis.
While many areas of banking were more tightly reined after the crisis, shadow banking went by mostly unscathed and, essentially, untouched.
How Big is The Shadow Banking Sector?
Some of the entities that are included in the shadow banking umbrella include hedge funds, payday lenders, money market funds, mortgage lenders, and investment banks. The shadow market industry is huge, estimated at $92 trillion just five years ago. According to the Financial Stability Board (FSB), the shadow banking sector comprises upwards of 30% of the entire financial system.
Shadow banking entities function in similar fashion to traditional banks, but they are not subject to much, if any, regulation at all. Clients can leverage credit and liquidity without deposit insurance or other safety features found in traditional banking.
Shadow Banking: Pros and Cons
Why would people take part in something like shadow banking? There are plenty of advantages. For instance, there is credit and funding to be had when other options are dry. Often, this is offered at a better rate than with a traditional bank.
Shadow banking tends to take on higher risks than traditional banking, making it a good go-to for investors in need of alternatives. Also, individuals who are struggling to access funding with their usual banks might turn to shadow banking.
Shadow banking does have its share of risks, however. While it might be a good option in some situations, it is important to note that shadow banking tends to skirt the usual regulation and safety nets that protect traditional depositors and investors. Shadow banking entities tend to bring a higher volume of risk to the financial sector, a trend that was proven with the economic disaster in 2008. Shadow banking has a direct impact on traditional banking and the entire economic system.
It comes as a surprise to many that the United States is at the top of the list when it comes to the biggest shadow banking countries (the Euro Area figure is collective, as the area consists of 8 countries.) Just over the summer, statistics showed that the United States singlehandedly had the largest shadow banking sector with $15.2 trillion in volume.
Crackdown on Offshore Banking is Pointless
So, you might be wondering how this all ties in with offshore banking. Well, figuratively speaking, let's just say that offshore banking is just a slice of a big pie of shadow banking sector.
While many of the other shadow banking entities tend to earn trust easier, such as payday loans and hedge funds, offshore banking does not. Yes, offshore banking is a part of shadow banking, but the truth is that it is often more legitimate than the other shadow banking entities.
In fact, offshore banking is typically far more transparent than shadow banking such as hedge funds. Offshore banking has come under an immense amount of scrutiny that has drawn negative attention to it for years. Over the years, offshore banking has become a target for governments everywhere wishing to better regulate the industry, and so today we see more regulations and a higher level of transparency than ever with offshore banking.
Takeaway
While it is true that some have used offshore banking as a way to launder money or commit tax evasion, the vast majority have leveraged offshore banking as a way to reduce tax liability and increase investing safety and privacy while diversifying wealth management.
It is interesting to note that, while the offshore banking sector tends to still receive negative publicity, the other shadow banking entities continue to escape government regulation and display a lack of transparency. Shadow banking is largely kept in the dark while offshore banking has become a gold star in the wealth management strategies of individuals and corporations alike.
Today, you can expect to find offshore banking that offers world-class online banking with a wealth of options including multicurrency investing and dynamic investment opportunities. While hedge funds and other investments might seem alluring, all that glitters is not gold.
Although these sectors have not had the negative publicity that has been thrown at offshore banking, they are the sectors that have led to economic disaster, and they are the very ones that continue to be neglected in terms of significant and meaningful regulations.
It’s those facets of shadow banking that will likely negatively impact the economy again, it seems.
DEC
2020
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