Cause and Effect: If you build it, will they come?

July 23, 2014
/   Spotlight

Many financial institutions assume that digital banking is lucrative because the most valuable customers happen to bank online. While there is certainly a correlation between online bankers and higher profitability, quantitative evidence suggests that...

Intuit 2020 Report: The Future of Financial Services

April 11, 2011
/   Insights

Today, Intuit released the latest edition of the Intuit 2020 report, Intuit 2020 Report: The Future of Financial Services, which identifies and examines four key trend areas that will  transform the financial services industry...

Fast Facts: Student Loans

January 22, 2013
/   Insights

The Financial Services Roundtable recently released another iteration of its Fast Facts, reliable, bullet-point research about issues facing the financial services industry. Topics span TARP, Dodd-Frank, insurance, lending, retirement savings and more.  Below are some updated Fast...

The Top 10 Trends in the Digital Banking Industry

December 18, 2013
/   Spotlight

2014 is rapidly approaching and as the year wraps, the Digital Insight team has pulled together the top 10 trends in the digital banking industry based on data and trends from studying financial institutions....

Making Banking Fun: Gamification in Financial Services

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/   Insights

Recently, the team sat in on American Banker’s webinar, “Gamification in Financial Services: Five Proven Ways to Get an Edge,” which shared how leading brands in financial services have applied gamification to reach...

Technology M&As: The Beats Go On

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/   Insights

The ongoing fascination with Apple’s $3 billion purchase of Beats Electronics is entirely understandable, because it’s a cool story. However, it also says a lot about what’s going on between finance and tech.

What We’re Reading

May 5, 2011
/   Spotlight

Below are interesting stories the staff has been reading over the past week. What have you been reading? Let us know in the comments section below. Virtual Banking Worlds Provide Tangible Lessons American...

Small Business: Perception vs. Reality

November 21, 2012
/   Insights

In the most recent election cycle, like most others before it, the one sector of the economy that got the most attention was small business.  This is the future, we were told by every...

What We’re Reading: Thanksgiving Edition

November 22, 2012
/   Spotlight

Below are interesting stories the staff has been reading over the past week. What have you been reading? Let us know in the comments section below or Tweet @bankingdotcom. Mobile Thursday? Plans for Thanksgiving...

There’s something cool about being ‘alternative.’ It’s why so many of us are drawn to alternative medicine, alternative energy, even alternative music—it just sounds cool. But how about alternative banking?

In a sense, that’s what shadow banking is: all the pain and pleasure of traditional banking, minus the rules and regulations. That’s the reason it’s getting so much attention now, and will likely get much more in the months ahead.

For sure, it’s already all over the map. Look at China, a prime market for investment and other business opportunities that’s currently in multiple cross-hairs. As a Reuters blog noted recently, strict restrictions on loans to the SMB market have led to the explosive growth of a shadow market comprising trust companies and short-term financing, with much higher rates of interest than the traditional model. This spawns numerous problems: In the city of Wenzhou last year, more than 40 business owners defaulted. Some of the money had come from pools of household savings, which in turn exacerbated the problem.

Nor is this a small-time problem. As the Financial Times just pointed out, several entities listed on Hong Kong’s Growth Enterprise Market, which was created to boost start-ups, are switching their business model to become money lenders. Even China Electric Power Technology Holdings, previously seen as the key to infrastructure building, is going this way.

Moving further west, there are clear signs that the entire European shadow banking system is teetering on the brink. There’s no question it’s at the core of the tectonic shifts in the viability of the Eurozone, with a huge impact on the Budesbank and potential peril to the entire banking system. And then there’s the largest shadow liability of all, some $15.5 trillion. That, for those who haven’t guessed is in the U.S—and as large as the figure is, it’s actually down from its peak of $20 trillion.

Despite this stunning growth, the term shadow banking is, by all accounts, quite recent. While there are likely other sources, it is most commonly attributed to remarks in 2007 by economist and money manager Paul McCulley. Still, the practice is as old as the hills.

But the fundamental question is just as old: Why is there so much money circulating outside the system? In fact, why are there so many individuals and entities willing to pay so much interest—in the case of some organizations in Hong Kong the figure is 42 percent, against a regular rate of 5 percent–to the lending institutions?

The reality is that much of shadow banking is quite legit, and much of the rest represents financial outliers that no credible banking institution wants to be involved with. But in the days and months ahead, the plethora of regulations now working their way through the legislative system in diverse regions—from Germany, where Chancellor Angela Merkel is threatening sharp mandates, to China, where the government is under pressure to bring more order to the system—will land in place and expose a strange disconnect.

There are people and companies around the world needing to borrow money, even at staggeringly high rates of interest, and there are people and companies willing to oblige them. All these transactions take place in what we might call an alternative universe, completely outside the banking system that’s been specifically designed for this contingency. And that’s not cool.

Could traditional financial institutions be playing a larger role in this vast shadow market, or would that mean lowering the criteria for making loans and lead to a replay of the mortgage mess?

Speculation welcome.



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James W. Gabberty

Gabberty is a professor of information systems at Pace University in New York City. An alumnus of the Massachusetts Institute of Technology and New York University Polytechnic Institute, he has served as an expert witness in telecommunication and information security at the federal and state levels and holds numerous certifications from SANS & ISACA.

Zachary Ehrlich

25-year-old writer, and as a native San Franciscan, I am unreasonably loyal to Bank of America, if only for their superhero-like origin story, involving the 1906 earthquake and Italian fruit vendors.

Brad Strothkamp

Marisa Mann

Marisa Mann brings over 15 years of experience in consulting and financial services industries to the Solstice team, working on large scale enterprise initiatives across many technologies, including specializing in the digital space – Internet and mobile. Mann is passionate about mobile and the endless possibilities for the enterprise, delivering business value through strong brand recognition and driving to excellence in the consumer experience. Prior to Solstice, Mann worked at JP Morgan Chase, Diamond Management and Technology Consultants, Washington Mutual, Inc, and Accenture.