The $70 Trillion Problem Keeping Jamie Dimon Up At Night

Tyler Durden's picture

Yesterday, in a periodic repeat of what he says every 6 or so months, Jamie Dimon - devoid of other things to worry about - warned once again about the dangers hidden within the shadow banking system (the last time he warned about the exact same thing was in April of this year). The throat cancer patient and JPM CEO was speaking at the Institute of International Finance membership meeting in Washington, D.C., and delivered a mostly upbeat message: in fact when he said that the industry was "very close to resolving too big to fail" we couldn't help but wonder if JPM would spin off Chase or Bear Stearns first. However, when he was asked what keeps him up at night, he said non-bank lending poses a danger "because no one is paying attention to it." He said the system is "huge" and "growing."

Dimon is right that the problem is huge and growing: according to the IMF which just two days earlier released an exhaustive report on the topic, shadow banking (which does not include the $600 trillion in notional mostly interest rate swap derivatives) amounts to over $70 trillion globally.

What he is very much wrong about is that nobody is paying attention to shadow banking: Zero Hedge has been covering the topic since early 2009.

Which is why we urge anyone who is curious to catch up on the issues surrounding non-bank lending, to read our 1,000+ articles on the topic.

However, for those who are time-strapped, here is a recent take from Bloomberg summarizing the IMF's 192-page report on Shadow Banking released last wee titled "Risk Taking, Liquidity, and Shadow Banking."

In a summary of the report, the IMF estimated the shadow banking industry at $15 trillion to $25 trillion in the U.S.; $13.5 trillion to $22.5 trillion in the euro area; $2.5 trillion to $6 trillion in Japan; and about $7 trillion in emerging markets.

 

Not included in the summary were estimates of the size of shadow banking in countries including the U.K., and Gelos said later at a press conference said the industry globally exceeds $70 trillion, citing figures from the Financial Stability Board.

One can see why Dimon is concerned.

“Shadow banking can play a beneficial role as a complement to traditional banking by expanding access to credit or by supporting market liquidity, maturity transformation and risk sharing,” the IMF said in the report. “It often, however, comes with bank-like risks, as seen during the 2007-08 global financial crisis.”

 

The report urges policy makers to address shadow banks with “a more encompassing approach to regulation and supervision that focuses both on activities and on entities and places greater emphasis on systemic risk.”

 

“Shadow banking tends to take off when strict banking regulations are in place, which leads to circumvention of regulations,” Gaston Gelos, chief of the IMF’s global financial analysis division, said in a statement accompanying portions released today of its Global Financial Stability Report. The full report is scheduled to be released Oct. 8.

 

Non-traditional lending “also grows when real interest rates and yield spreads are low and investors are searching for higher returns, and when there is a large institutional demand for ‘safe assets’” such as insurance companies and pension funds, he said.

 

Shadow banks include money-market mutual funds, hedge funds, finance companies and broker-dealers. They pose a risk to the broader financial system because they rely on short-term funding, “which can lead to forced asset sales and downward price spirals when investors want their money back at short notice.”

Below are the main findings reported by the IMF regardign shadow banking. Note: those following our periodic updates on the state of the US and global shadow banking system know all of this.

  • Although shadow banking takes different forms around the world, the drivers of shadow banking growth are fundamentally very similar: shadow banking tends to flourish when tight bank regulations combine with ample liquidity and when it serves to facilitate the development of the rest of the financial system. The current financial environment in advanced economies remains conducive to further growth in shadow banking activities.
  • Most broad estimates point to a recent pickup in shadow banking activity in the euro area, the United States, and the United Kingdom, while narrower estimates point to stagnation. Whereas activities such as securitization have seen a decline, traditionally less risky entities such as investment funds have been expanding strongly.
  • In emerging market economies, shadow banking continues to grow strongly, outstripping banking sector growth. To some extent, this is a natural byproduct of the deepening of financial markets, with a concomitant rise in pension, sovereign wealth, and insurance funds.
  • So far, the (imperfectly) measurable contribution of shadow banking to systemic risk in the financial system is substantial in the United States but remains modest in the United Kingdom and the euro area. In the United States, the risk contributions of shadow banking activities have been rising, but remain slightly below precrisis levels. Our evidence also suggests the presence of significant cross-border effects of shadow banking in advanced economies. In emerging market economies, the growth of shadow banking in China stands out.
  • In general, however, assessing risks associated with recent developments in shadow banking remains difficult, largely because of a lack of detailed data. It is not clear whether the shift of some activities (such as lending to firms) from traditional banking to the nonbank sector will lead to a rise or reduction in overall systemic risk. There are, however, indications that, as a result, market and liquidity risks have risen in advanced economies.
  • Overall, the continued expansion of finance outside the regulatory perimeter calls for a more encompassing approach to regulation and supervision that combines a focus on both activities and entities and places greater emphasis on systemic risk and improved transparency. A number of regulatory reforms currently under development try to address some of these concerns. This chapter advocates a macroprudential approach and lays out a concrete framework for collaboration and task sharing among microprudential, macroprudential, and business conduct regulators

The main risks surrounding shadow banking per the IMF:

  • Run risk: Since shadow banks perform credit intermediation, they are subject to a number of bank-like sources of risk, including run risk, stemming from credit exposures on the asset side combined with high leverage on the liability side, and liquidity and maturity mismatches between assets and liabilities. However, these risks are usually greater at shadow banks because they have no formal official sector liquidity backstops and are not subject to bank-like prudential standards and supervision (see Adrian 2014 for a review).
  • Agency problems: The separation of financial intermediation activities across multiple institutions in the more complex shadow banking systems tends to aggravate underlying agency problems (Adrian, Ashcraft, and Cetorelli 2013).
  • Opacity and complexity: These constitute vulnerabilities, since during periods of stress, investors tend to retrench and flee to quality and transparency (Caballero and Simsek 2009).
  • Leverage and procyclicality: When asset prices are buoyant and margins on secured financing are low, shadow banking facilitates high leverage. In periods of stress, the value of collateral securities falls and margins increase, leading potentially to abrupt deleveraging and margin spirals (FSB 2013b; Brunnermeier and Pedersen 2009).
  • Spillovers: Stress in the shadow banking system may be transmitted to the rest of the financial system through ownership linkages, a flight to quality, and fire sales in the event of runs (see Box 2.1 and the section “Systemic Risk and Distress Dependence”). In good times, shadow banks also may contribute substantially to asset price bubbles because, as less regulated entities, they are more able to engage in highly leveraged or otherwise risky financial activities (Pozsar and others 2013).

And for the visual learners, here is the chart breakdown:

Much more in the usual place

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gdogus erectus's picture

No one pays attention because it takes an interest combined with an IQ of about 130 to understand any of this. They count on it.

X.inf.capt's picture

the only thing that keeps him awake at night is his $25000 a night 'companion'...

Pladizow's picture

Sociopaths don't worry!

Wolves don't lose sleep over the opinion of sheep!

Squid-puppets a-go-go's picture

wow, man, Sooooo much stuff that is crying for gold backing.

What are we up to now, $200 000 per ounce to properly deleverage?

Rememberweimar's picture

Seventy Trillion pieces of green confetti... That's a lot of confetti...

strannick's picture

"600 Trillion in Interest Rate Swaps''. Its ALL about these interest rate swaps. These are the Primary dealer banks swapping variable rate interest rates against fixed interest rates. This is the hydralic hammer that keeps a lid on interest rates for the moment, and are similar in nature to the gargantuan naked shorts that banks sell to keep a lid on the gold price. Since there is no way in hell they will ever pay, or deliver, they just pile it on to infinity (they are 600 trillion dollars on the way to infinity already)

These Primary Dealer Banks have 600 trillion bet that interest rates will go lower. And it is the magnitude of these interest rate swaps that pushes interest rates lower, right up until the day it doesnt. Nothing else is pushing interest rates lower, and interest rates certainly are not at alltime lows because of the credit worthiness of the US Treasury, whose debt/GDP has never been higher.

Be very scared, and load the boat with gold (and find a GPS corordinate for it when you dump it in the lake)

knukles's picture

"The problem, Jamie thought to himself, "is those fuckers taking away our business."

X.inf.capt's picture

that is probably closer to the truth than we all realize...

on so many levels...

palmereldritch's picture

Sorry....was it,

"...he has throat cancer..." or "...he is throat cancer..." ?

Kirk2NCC1701's picture

+1. Bingo! We have a winner!

I know 'people' who are making private investments and bypassing the banks.

kaiserhoff's picture

Gee, at that price, you would think he could find a hooker who doesn't snore.

NoDebt's picture

You don't pay them for sex, you pay them to leave.

RaceToTheBottom's picture

Building complexity for the sake of concealment has always been used by the WS PTB.  

Most of what WS produces takes one basic idea: "Time value of money" and makes it more complex.

failure to perform's picture

He's not paying attention because he'll be dead before it matters.

booboo's picture

I would disagree, any 3rd grader would know not to trade a peanut butter and jelly sandwich for an empty ziplock bag.

Hohum's picture

I sleep less; that's why I am richer than you!

e_goldstein's picture

That's what's keeping Jamie Dimon up at night?

I was hoping it was the throat cancer.

A Lunatic's picture

I almost hoped it was his conscience, but that would have been really fucking stupid.....

kaiserhoff's picture

Yeah, does he really have throat cancer, or is that just wishful thinking, and voodoo dolls?

Freedumb's picture

I suppose all the carcinogenic bullshit, faulty advice and hot air constantly coming out of his mouth must have caused it

Debt-Is-Not-Money's picture

Nah, like Michael Douglas- bad pussy!

angel_of_joy's picture

His Karma is a bitch... for a reason.

Conax's picture

JD might be faking it for sympathy.

'Don't hang me, my throat is sore.'

He can also turn down interviews, get free ice cream, all sorts of perks.

mendolover's picture

If he's truly a globalist and not just a minion he had the cancer vaccine years ago.

mendolover's picture

Finally a cancer joke.  I was wondering if the ZHers were getting soft.

IndyPat's picture

I'm going with the pervasive smell of brimstone and sulfur coupled with the ear piercing screams of torment from the pit.
Contract...is almost up. "He" won't take paper, this time. Taking delivery of the physical.

Yen Cross's picture

 Indy Pat. I'm afraid to ask.

IndyPat's picture

What keeps him up at night...

holdbuysell's picture

"Much more in the usual place"

Holy sh*t. To my chagrin, I never realized that the Tylers organized past articles so well by tags. Great job!

Hellone's picture

WHAT KEEPS THE BABYLONIAN TALMUDIC PRINCE UP AT NITE LOL???

NOTHING!!

HE SLEEPS WELL KNOWING THAT THE FILTHY WHITEY DOG GOYIM HE CAN ROB AND KILL IN THIS CENTURY ARE ESPECIALLY NITWIT FAT LAZY IMPOTENT NIMRODS!!

HIS ONLY AND I MEAN HIS ONLY CONCERN IS WILL HE GET A MEDICAL RETIREMENT BONUS FOR LEAVING ON ACCOUNT OF THE LUNG CANCER HE MAGICALLY ACQUIRED.

holdbuysell's picture

"NITWIT FAT LAZY IMPOTENT NIMRODS"

Actually Nimrod was a Nephilim from the Babylonian times; nasty evil cunning stuff and very much antithetical to how the name is used today.

A Lunatic's picture

He prolly meant dilrods, cut him some slack.......

holdbuysell's picture

It's all good; Hellone's point is well-said, and my comment was not meant to demean or to detract from it. I nitpicked on something ancillary to his main point but an area that is murky to interpret but potentially profound in understanding why we are where we are.

thewayitis's picture

 WTF  Blow up already. The sooner the better.........

 

Rubbish's picture

Why I always use new banks, trees still have the big stakes holding them.

 

Long Stihl

ekm1's picture

Interest Rate Swaps are part of shadow banking, but anyway.

 

What Tylers are talking about is what I call USD RESERVE GLUT

 

There are about $70 trillion sloshing around the world constantly claiming $80 trllion annual world GDP.

That's why world is avoiding USD, just too, too, too, too many claims on world real assets and output.

 

The existence of shadow banking at $70 trillion, means that economy is not producing nearly enough output, hence now money is chasing money, not output.

When I use the term Shadow Banking Weimarization, it is precisely about this $70 trillion, money chasing down money, using oil, iron, ore, aluminum, grains, soybeans etc as collateral.

This is the Modern Weimar.

 

Economy is dying and will continue to die unless US Congress orders the Fed extinguish at least $10 trillion, if not $20 trillion, otherwise world will continue to avoid USD thus going local, death of globalization

 

Unlike Weimar times, people cannot burn paper money now. Only Fed or US Gov can electronically extinguish USD and they will, otherwise economic misery

Bangalore Equity Trader's picture

Listen 1.

Don't be ridiculous. You can't just "EXTINGUISH" USD's.

It must be taken first, from some one or some thing, then extinguished.

holdbuysell's picture

EKM1...BE makes a good point. How do you extinguish said digital dollars? You speak of expropriating trillions from some unlucky oligarchs. Is that the path your thesis suggests?

ekm1's picture

Yes.

Unplug offshore computers.

There are $20 trillion minimum as digits in computers in offshore banking centers

 

Bail-in idea itself ...is basically extinguishing of dollars by government order, just mark down digits on computers for everybody

angel_of_joy's picture

You extinguish money every time you CANCEL DEBT (also known as DEFAULT).

ekm1's picture

Yes.

Unplug computers. Shut down offshore banks. Bank collapses

Eventually all comes down to typing up or down digits on computers.

So, yes, anything can be done.

 

There are no $70 trillion in paper cash to take away from people. Just change numbers on computers

holdbuysell's picture

If you've considered such a thesis, then those in harm's way also sense this possibility, which would suggest they have contingency plans or protection in some form. Trillions held by oligarchs is not going quietly down a drain. It will look like a Horcrux being destroyed.

ekm1's picture

That is what happened with Lehman, Bear Stearns, MF Global.

Elite always wars against elite for control of assets. That's why I always laugh at "world government" or IMF or any world institutions. 

It is humanly IMPOSSIBLE to have world institution that actually function.

 

There is no escape. The only contingency plan is controlling the government, like Buffett controlling Obama, Senate Banking Committee and House Finance Committee

Not all of them can, only few can. The rest? Sacrificial lambs, just like Lehman, Bear Stearns and MF Global and more to come probably Barclays, Merryll LYnch, etc etc etc

There is no escape.

holdbuysell's picture

Who're the next sacrificial lambs? My take is Citi and Deutsche Bank, maybe BofAML.

ekm1's picture

Saudis own part of Citi. I'd exclude Citi, or maybe partial restructuring keeping Saudi money safe

Barclays, part of Deutsche, Bofaml...etc

holdbuysell's picture

Understood. The consolidation in banking continues. Running this trend and though experiment to its end, isn't the logical end to this a single bank that controls all, which in turn is controlled by the shadows?

ekm1's picture

There is no such thing as central control of the globe. It is humanly impossible.

NoDebt's picture

Won't stop them from trying.

ekm1's picture

Sure. But humans can never ever agree on anything.

Huge egos like oligarchs can never become humble enough to cooperate, particularly coming from different languages and cultures.

That is how humans function