A new report from Moody’s highlights the clear and present risks posed by “less regulated and transparent parts of the global financial system.” In particular, financial institutions carrying “more leverage, less liquidity and weak risk management will find it harder to navigate the cycle.” But wasn’t this time supposed to be different? See Shadow Banking Stress Lurks, Moody’s warns:
Tighter financial conditions make it tougher to generate strong returns and secure funding, the report noted.
These challenges are particularly acute for shadow banks that “adopted leverage-driven investment strategies or took on maturity risks when funding was inexpensive and abundant,” it said. Also, investment funds “face liquidity risks from redemption runs or margin calls triggered by falling asset values or weaker portfolio performance,” it said.
These issues could also spill over to the real economy, particularly in markets where shadow banks provide a larger share of funding to certain sectors, such as the small business and real estate sectors, which is the case in the U.S., the U.K., Korea and Brazil, Moody’s noted.
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