Shadow Banking a Growing Threat to Global Financial Stability

by Brian T. Lynch, MSW

A Caribean Island Resort

A new global financial regulatory agency, the Financial Stability Board (FSB), quietly emerged from the dust of the Great Recession of 2007. "The FSB’s creation came after the G20 Summit in London in April 2009.

Headquartered in Basel, Switzerland, the board includes all G20 major economies. The FSB consists of 68-member institutions. It comprises several central banks, ministries of finance, and supervisory and regulatory authorities from 25 jurisdictions, as well as 10 international organizations and six Regional Consultative Groups (RCGs). It’s stated purpose seems to be, “… policy work to enhance the resilience of non-bank financial intermediation… [focusing] on those parts of non-bank financial intermediation that perform economic functions which may give rise to bank-like financial stability risks.”

In other words, global shadow banking and finance networks have grown so large and powerful that they pose a threat to the whole nation-based international banking and finance system.

The Financial Stability Board says they are responsible for:

· Preparing annual reports on the implementation of reforms and their effects

· Coordinating financial sector policies

· Conducting outreach activities [To WHOM?]

· Building resilient financial institutions

· Addressing SIFIs [Systemically Important Financial Institutions]

· Making the derivates market safer [Which was the epicenter of the financial collapse in 2007]

· Enhancing the resilience of non-bank financial intermediation [NBFI]

· Formulating additional policies on specific areas of the global financial market

· Preparing progress reports to the G20 

.  Conducting peer reviews

· Analyzing the effects of reforms

So, this is an autonomous international agency reporting to the G20, yet it is independent of the G20 or any other democratically elected government authority. It analyzes and proposes and monitors non-government enforced regulations of cross-border financial interactions between traditional international banking institutions and the global shadow banking institutions. It exists to keep the global economy on an even keel, and it prepares reports. Here is their 2018 report on the health and extent of global, non-standard financial institutions.  Global Monitoring Report on Non-Bank Financial Intermediation 2018 

Have you ever heard of NBFI, "Non-Bank Financial Intermediation?"

I first came across this term looking for information about a high-end tourist destination, a small, self-governing island in the Caribean, one of many such places. In addition to high-end tourism, its economy is also dependent on offshore financial services. Among the financial services listed on the internet about the Island's economy is the 'financial intermediation sector. (The what, I ask? )

Section #4 of the FSB report explains that financial intermediation: "… focuses on those parts of non-bank financial intermediation where bank-like financial stability risks may arise. The narrow measure of non-bank financial intermediation, which reflects an activity-based “economic function” assessment of risks, grew by 8.5% to $51.6 trillion in 2017, at a slightly slower pace than 2011-16. The narrow measure of non-bank financial intermediation, which reflects an activity-based “economic function” assessment of risks, grew by 8.5% to $51.6 trillion in 2017, at a slightly slower pace than 2011-16.

Since 2011, the Cayman Islands, China, Ireland, and Luxembourg together have accounted for over two-thirds of the dollar value increase. The narrow measure represents 14% of total global financial assets. Key components include:

· Collective investment vehicles (CIVs)

· Non-bank financial entities engaging in loan provision that is dependent on short-term funding

· Market intermediaries that depend on short-term funding or secured funding

· Securitisation-based credit intermediation

Section 2 provides an overview of, “Other Financial Intermediaries” (OFIs) aggregate, which includes all financial institutions that are not central banks, banks, insurance corporations, pension funds, public financial institutions or financial auxiliaries. These alt-financial entities grew by 7.6% in 2017. OFIs’ growth exceeded that of banks, insurance corporations, and pension funds. With $116.6 trillion, OFI assets represent 30.5% of total global financial assets, the largest share on record."

These invisible, unaccountable entities are apparently a go-to source for loans by the global banks and nation-based financial institutions. In November 2010, the FSB defined shadow banking as “credit intermediation involving entities and activities (fully or partly) outside of the regular banking system” 

Then, On 22 October 2018, the FSB announced its decision to replace the term “shadow banking” with the term “non-bank financial intermediation,” a less sinister sounding accommodation.

So, what is really going on here? 

It seems that billionaires, oligarchs, and their self-dealing minions are growing an alternate financial network that is fully or partially outside of national boundaries. It is certainly outside the direct control of the traditional international banking and finance systems. Traditional international bank institutions appear to be both fearful of, and increasingly dependent on this dark money network the reach of nations. The FSB says, “Non-bank financing provides a valuable alternative to bank financing for many firms and households, fostering competition in the supply of financing and supporting economic activity.”

Competition indeed. The OFTs alone account for close to a third of all the world’s financial wealth. This appears to be a socially malignant private treasury of wealth with no direct productive value. It is accessible only to wealthy corporations and the very rich. The capital gains of this private wealth cannot be taxed for the benefit of any global society.

This whole development may be more than a financial risk to the global economy. It may be a burgeoning threat to the sovereignty of nations and the sanctity of self-governing democracies everywhere. It is a development worthy of our attention and vigilance.

Read the full FSB report here:https://www.fsb.org/wp-content/uploads/P040219.pdf

Should Living Wage Minimums be Based on Individuals or Families?

by Brian T. Lynch, MSW

“No business which depends for existence on paying less than living wages to its workers has any right to continue in this country... By living wages, I mean more than a bare subsistence level — I mean the wages of a decent living.” (1933, Statement on National Industrial Recovery Act - Franklin Delano Roosevelt)

Question:  In looking at the Living Wage calculator, I see that $10.83 for a single adult in Morris County, New Jersey where I live. This seems fair to me for a single person, but when you add one child to that scenario the rate jumps to $22.12 per hour. This raises a serious question.  Does the Living Wage Movement suggest that wages should be adjusted according to need? [ http://livingwage.mit.edu/ ]

Answer:  That's a great question. I am not a spokesman for, or advocate of, the living wage movement as an organization. I do believe that living wages should be the minimum wage in this country.  Minimum living wages should be what we pay summer college help or student interns, not full-time employees. It might also be appropriate for part-time seasonal help. It shouldn't be what we pay permanently hired employees.

To answer your question, I researched what a living wage is in the 130 cities that have living wage laws. It turns out that their wage base is for a single employee, not including any dependents. A living wage in Manchester CT equals $15.54/hour (the highest) while it is $8.50 in Orlando FL (the lowest).  It would appear that the Living Wage Movement is looking to index a minimum living wage minimum to local economies based on one adult with no dependents.

That said, the minimum wage in 1986 was $10.86/hour  as opposed to its current level of $7.25/hour.  If it had been indexed to inflation in 1986 the current minimum wage today would be $23.59/hour today. That clearly was intended to provide for a worker with a family. The current median family size is 2.54 persons per household. That inflation adjusted wage equals about $47,000 per year while the current median family wage is a little over $51,000 per year (and still declining, I might add).

Here's the thing, we have only been talking about wage adjustments to keep pace with inflation. We have not been talking about raising wages to reward workers for our growing productivity. We haven't been talking about sharing the wealth that workers help create so everyone keeps pace with America's growing economy. Cost of living adjustments are important, but they shouldn't be confused with a productivity, or merit raise.

America is $1.7 trillion richer today than it was in 1976. Our economy has doubled, yet the share of all that new wealth created by American workers in this same period is insignificant.

In the 1960's my father was an appliance repairman at Sears. His salary was enough that my mother could stay home and raise my sister and me. Her role as mother to the next generation of citizens was valued. Today, a typical family of four earns about $51,000 only because both parents work. They are only able to make ends meet because of easy access to credit to shift their financial burdens onto their future earnings.

When I speak about a living wage I dream of getting back to a point where one breadwinner can hold one full-time job and still raise a small family without needing government assistance to do it. That's what we had, and that should be our goal for America.

Inequality on a Global Scale (literally)

The cartoon below is from the great editorial cartoonist Stuart Carlson. It highlights with humor a very serious global economic condition, growing wealth inequality.

http://www.gocomics.com/stuartcarlson/2014/06/20#.U9Zns_ldXfJ (Go and enjoy his other cartoons.)


Allow me to breakdown the math for you. These figures work out to an average of $486 per poor person vs. $20 billion per rich person. This is not a measure of income but a measure of wealth, or capital.

Another important math fact from this illustration: If you have $20 billion in capital and earn an average return on investments of 4% a year, and if you lavishly spend $1 million per month on your lifestyle, at the end of 50 years you will still have $140 billion left for your children to inherit. That's right, if you have seven children they would each get close to the 20 billion that you started out with.

This is the crisis of capital that we face. This fact is among the findings of economist Thomas Piketty in his recent book, Capital in the Twenty-First Century. Within just a few generations almost all the wealth on the planet will be handed down from parents to children. Almost no new fortunes will be made through the earnings of those who have to work for a living. We will effectively return to a feudal system even here in the United States and abroad. The phenomenon is global. The quicker national and global population stabilize or decline the faster wealth will concentrate among the wealthy.

All we have to do to return to a feudal society is... do nothing.

Someone on facebook asked me, "Is it really the zero-sum game that these breakdowns of wealth distribution always seem to imply?"  Good question! Is it the case that the growing wealth of the wealthy must come at the expense of growing poverty Or, doesn't the growth of capital lift all ships?

When you look at national and global income-to-capital averages you see what looks like fairly stable ratios. Growing capital wealth and growth in income seem to balance. But look a littler closer and you see that more of the population falls into poverty as the value of capital grows at compounded rates. So yes, there is more national income, but there is an ever larger percentage of income coming from capital investments and going to the wealthy.  As capital becomes the main source of income, the real earnings of wage earners stretches and collapses at the lower end of the economic scale.  For the middle class, it is like being caught between the gravitational fields of two black holes... one created by poverty and  the other by capital wealth