How Shadow Banks Rule the World

There are plenty of proposals for stricter controls. Since 2010, the US money market funds have at least had to disclose more details about where they invest. They are also required to have more cash reserves on hand in case large numbers of customers suddenly want to withdraw their deposits. Andresen would also like to install thicker security buffers or water down the value guarantee that money market funds give their investors. Money Market Funds Are Needed

The crazy thing is that Andresen's efforts could bring about precisely the opposite of what he wants to achieve. Because of low interest rates on the bond markets in which money market funds invest, profit margins are already extremely slim. "The business isn't profitable at the moment," industry representative Stevens says emphatically. Stricter rules would cost even more money, and Stevens predicts that many fund managers would quit the business for good.

That too is a nightmare scenario because it would mean that not only many banks, but also companies and even a number of US municipalities would lose an important source of funding. Money market funds buy two thirds of the short-term debt securities issued by American municipalities. Companies that need fresh money to run their daily operations also regularly resort to the shadow lenders of the financial industry.

"The world would be a very, very dark place without money market funds," says Alice Joe of the US Chamber of Commerce. That's because many companies need millions from one day to the next, she explains. All it takes is a call in the morning to the right dealer, "and they'll have the money in their account that afternoon." The same process would take three days with banks.

Even giants like the EADS Group often rely on short-term funds because aircraft production is expensive. If something goes wrong in the production chain, the group's financial managers need to come up with giant short-term loans within hours. When EADS issued €300 million in new bonds a few weeks ago, "they were placed within 15 minutes," says Jörg Weber, who handles the group's dealings with money market funds. It cannot be in the interest of regulators to see such an important industry fall apart, says US lobbyist Stevens.

It's because of concerns like this that the realm of the shadow banks will likely continue to grow. The stricter the regulations for normal banks, the more money migrates to the unregulated parts of the financial world. FSB Secretary General Andresen fears that investors will soon forget the potential consequences of risky deals with shadow banks. "And if regulations aren't in place by then, we could easily experience something similar to what happened in 2008."

Translated from the German by Christopher Sultan

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