The Financial Stability Board (FSB), a global financial policy group comprised of regulators and central bankers, just released new information on the status of the "shadow banking" industry. First, the FSB reported that from 2002 through 2011 the shadow banking industry grew by $41 trillion. Second, the shadow banking industry now is estimated to have $67 trillion in assets.
Note, as of November 7, 2012, the Federal Reserve H.8 statistical release shows that the total assets of all commercial banks in the United States amounts to a little less than $13 trillion. Third, the United States has the largest amount of shadow banking assets in the world, about $23 trillion.
Note, the share of activity based in the United States "has decline from 44 percent in 2005 to 35 percent in 2011." The eurozone has $22 trillion in assets while Great Britain has $9 trillion.
What is a shadow bank? Lord Adair Turner, the U.K. regulator that led the FSBs work stated, "If it looks like a bank and quacks like a bank, it has got to be subject to bank-like safe-guards." So, shadow banking is like pornography, it is what is in the eye of the beholder … in this case the regulator. It looks, therefore, as if we are in for another major round of rules and regulation for the finance industry … worldwide!
Looking for a job? I have seen many, many references to the health industry as the place to be if you want to get employed over the next decade or so. Looks to me like we have another growth industry here! If you want to get employed in a good steady job for an extended period of time become a regulator of the financial industry. Sounds like there are going to be plenty of jobs available and the pay will be pretty good. Also, security and pensions will be the best. Have you ever heard of a regulator getting fired? Have you ever heard of a regulators pension going unfunded?
One reason for long tenure in the regulatory industry is that the problem regulators face will be around for a long time. What is that problem? Financial institutions are always way ahead of the rules and regulations. Regulators are always fighting the last war! And, this is just as it should be.
It reminds me of the New Yorker cartoon showing two bankers talking. Apparently, new banking rules have just come out. The bankers now have the job of finding out how to get around the new rules.
If there has been one common theme running through my almost five years of posting blogs on Seeking Alpha it is that bankers always have been and always will be ahead of bank regulations and bank regulators. Given the advances in information technology, the tools available to keep ahead of the bankers is mind-boggling. Remember, finance is just information!
So, if bankers, or even more so, shadow bankers have to face growing efforts to regulate organizations that "look like a bank" and that "quack like a bank" it sounds as if we have another growth industry, so there should be plenty of jobs throughout the world for financial "quants." So all you physicists and engineers and information theorists, get your resumes ready. There are going to be plenty of jobs ready for you in the financial industry. And, look at the statistics shown above. The share of assets housed in the United States declined from 44 percent to 35 percent from 2005 to 2011. Talk about a worldwide financial market!
That is the one thing about information technology … it flows to the area of least regulation! So, regulate me here … and I will go there. Now, regulate me over there and I will go somewhere else.
Just think, over the past ten years or so we have had the greatest amount of new bank and financial industry regulation in history of the world and the assets of commercial banks have just increased by a relatively small percentage. But, the shadow banking industry has increased from about $26 trillion in 2002 to $67 trillion in 2011. That's a growth of almost 160 percent!
Looking for investments in the future? Don't invest in commercial banks. Invest in "shadow banks" that are not regulated. And, keep your eyes open for "shadow" shadow banks that will be the next round of financial innovation after the regulators move into the are of shadow banking. Remember, the bankers are always out in front of the regulators as the regulators fight the last war. The trick is to find those bankers that are out in front of the regulators. More on this in future blogposts.