Gillian Tett: Burgeoning Shadow Banking Sector dependent on Regulatory Arbitrage

In the FT today Gillian Tett points out that while the media glare falls on the big banks that are currently reporting their third quarter earnings, the real story is the Shadow Banking sector’s continued colonisation of those sections of the market that were once served by those very same big banks.

Rules that were originally brought in to make banks lend more responsibly and avoid another global financial crisis have created an opportunity for the Shadow Banking sector.

Despite low interest rates and quantitative easing ensuring that there’s plenty of money sloshing around the system, it’s taken innovation and financial engineering to bypass the new rules and kickstart lending to riskier borrowers i.e. small businesses.

Tett says “The real secret of of finance today is that the real credit growth in the US is happening in the world of private capital.”

She calls out the process whereby big banks lend to the Shadow Banking sector which in turn lends to small businesses as being nothing more than ‘regulatory arbitrage’.

As the journalist who warned of the imminent credit derivative fuelled credit crunch in her forensic piece The Dream Machine back in March 2006 – when it comes to regulatory arbitrage, this journalist really knows what she’s talking about.