Counterparties: Measuring the shadow banking industry

May 29, 2012

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In a new report, Deloitte cites no fewer than eight different definitions of a sector that’s anywhere between $10 trillion and $60 trillion in size. Welcome to the amorphous world of “shadow banking.”

The Deloitte Shadow Banking Index attempts to estimate the size of an assortment of financial activities that happen, at least in part, outside the normal world of  regulated banking. Shadow banking, as Ben Bernanke put it, is how your car loan – or, before the crisis, your mortgage – gets chopped up, sold to investors and might even end up in your neighbor’s mutual fund. It includes the kind of securities-lending operations which helped to blow up AIG, and it’s vulnerable to a relatively new and dangerous kind of run.

Under Deloitte’s own definition, the US shadow banking system has essentially been cut in half since 2008, to roughly $10 trillion at the end of 2011. This figure is significantly smaller than previous estimates, including one by New York Fed staffers, which put the size of the US shadow banking system at $15 trillion.

So is it good news that the ominous-sounding shadow banking system has shrunk? Mostly, yes. But this is a notoriously hard market to define. Deloitte’s definition of shadow banking excludes some “financial intermediaries” (read: the next AIG), agency mortgage-backed securities (owned by taxpayers through the government’s takeover of Fannie and Freddie) and money market mutual funds. It also, of course, doesn’t account assets at real banks, like the derivatives that recently lost JPMorgan billions.

What’s more, it’s hard to be consoled about the shadow banking system’s $10 trillion size when marquee regulators likeAdair Turner andDaniel Tarullo are still calling for more reforms.

And on to today’s links:

Must Read
“Spain is an unhappy federal structure held together by subsidies and crooked accounting” – Walter Russell Mead

Hackers
One of the most complex cyber threats in history is infecting Iranian computers – Wired

Politicking
Last year’s congressional debt ceiling debacle hurt consumer confidence more than Lehman’s collapse – Bloomberg

JPMorgan
The hedge fund manager who outsmarted JPMorgan – NYT
JPMorgan’s move to cover its hedging losses begins with a $25 billion sale – Reuters

Tax Arcana
Christine Lagarde, who recently chided Greek tax evaders, pays no taxes on her $551,700 annual compensation – The Guardian

EU Mess
A frightening guide to the increasingly likely end of the euro zone – The Baseline Scenario
Eurobonds would be a “noble expression of European solidarity,” if anyone knew how they’d actually work – NYT
The European repo curve has gone inverted – FT Alphaville

Facebook
We’re “witnessing a significant shift in power from shareholders to entrepreneurs and managers” – New Yorker
“The stock market is no longer the common ownership of the means of production” – Felix

New Normal
US manufacturing is recovering – thanks, in large part, to stagnant wages – WSJ

Old Habits
New Yorkers’ love of coffee, quantified – Massive Health

Ouch
Dewey & LeBoeuf files the largest law firm bankruptcy in history – DealBook

Retro
Revisiting a “making a living from blogging” post 10 years later – Blogads

Bold Moves
Chicago’s ambitious plan for zero traffic fatalities – The Atlantic Cities

Stuff We’re Not Linking To
The plight of Harvard graduates includes telling people they went to Harvard – Boston Globe
Henry Blodget wants to know why people hate Jews – Business Insider

More From Felix Salmon
Post Felix
The Piketty pessimist
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The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
5 comments so far

About this –

“JPMorgan’s move to cover its hedging losses begins with a $25 billion sale – Reuters”

Hmmm … still hasn’t figured it out yet, has he? “Eating your seed corn” – you’d kind of expect better from “the smartest guy in the room”, wouldn’t you?

And from the cited piece -

“Dimon has not said who at the bank decided to sell the securities.”

Oh please, ….

Posted by MrRFox | Report as abusive

About that very last Business Insider non-link –

Not gonna touch the substance of it, but the piece has a pop-up link to something about everybody’s favorite FB friend, here –

http://www.businessinsider.com/outrage-i n-italy-as-zuckerberg-leaves-no-tip-for- honeymoon-lunch-2012-5?utm_source=sailth rusuggest&utm_medium=rightrail&utm_term= &utm_content=&utm_campaign=recirc

Class and character always reveal themselves over time. Not like it’s anything his record and recent events hadn’t already indicated.

Posted by MrRFox | Report as abusive

MrRFox:

European service industries are not U.S. service industries.

Tips in Italy are not anything like the portion of income for wait staff as they are here.

But antisemitism seems about the same on both sides of the pond.

Posted by mere_mortal | Report as abusive

@MereM – apparently someone needs to tell this to the staff at that Italian restaurant -

“European service industries are not U.S. service industries. Tips in Italy are not anything like the portion of income for wait staff as they are here.” (MM)

Posted by MrRFox | Report as abusive

“This figure is significantly smaller than previous estimates, including one by New York Fed staffers, which put the size of the US shadow banking system at $15 billion.”

I think you may have meant 15 TRILLION…?! Please let me know if I am mistaken?

Thank you for all of your good work!!

Posted by humanity101haha | Report as abusive
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