London Daily

Focus on the big picture.
Tuesday, Jul 22, 2025

Here’s where the next financial crisis starts

Here’s where the next financial crisis starts

There are ‘accidents’ waiting to happen. How to stop them isn’t altogether clear.

It couldn't happen again. Could it?

When banks blew up the global economy in 2008, regulators from Brussels to Washington scrambled to put up the scaffolding. That was all well and good, but what about the parts of the financial system that were left behind? A few ripples under the surface are now causing insiders to break out in a cold sweat.

Alarm bells are ringing about so-called shadow banks or nonbanks — not banks in the traditional sense at all, but structures such as investment funds, insurers, private equity, pension and hedge funds. Not only did they escape some of the stricter rules imposed during the last crisis but they also benefited by taking on a lot of the risks from the ordinary bank sector.

But the post-crisis good times are coming to an end. Central banks are increasing interest rates in an effort to tackle soaring inflation meaning the era of cheap money is over.

And regulators fear the vulnerabilities that have built up over the past few years are ready to explode and send shockwaves across the world.


Ominous playbook


The dwindling supply of money in the shadow banking system means "you see some of the issues that are there — being exposed," warned Verena Ross, the chief of the EU’s securities regulator, in an exclusive interview with POLITICO.

It's not difficult to see what might happen, and how. So far a series of mini-crises — relatively small and self-contained — means there's a clear and ominous playbook for how a problem in shadow banking starts, and then spreads:

— The prime example is the turmoil that hit U.K. pension funds in the fall, with the Bank of England having to step in to buy bonds to calm markets.

— Similarly, volatile price swings in futures markets sparked by Russia’s invasion of Ukraine created a cash crunch at European energy companies.

— At the start of the pandemic, a “dash for cash” by companies created problems in short-term debt markets — again requiring a central bank intervention.

— And in 2021, the collapse of the Archegos hedge fund spread losses on large hidden bets to banks.

The same themes run through all those wobbles: short-term cash pressures, risky bets and domino effects.


Further risks


“What you see in all these [peripheral] episodes is that there’s a common issue around … liquidity, leverage and interconnectedness," Ross said. And these are "common indicators of issues that we need to look at, to identify where potential further risks might be coming from."

It's not just the securities regulator. Other watchdogs are sounding similar warnings about how shadow banks could accentuate a crisis.

A change in financial market conditions could lead to short-term cash stress and trigger forced selling, Jérôme Reboul, managing director of the regulatory policy and international affairs directorate at the French Autorité des Marchés Financiers (AMF), said.

That could create a “self-reinforcing mechanism” where selling drives prices down further, creating more pressure on investors — or more cash demands through margin calls on derivatives positions. “That’s the episode that everybody has in mind,” he said.

But while almost everyone agrees the shadow banking sector might be an accident waiting to happen, there isn't a clear or agreed plan for how to stop it.


What to do


Global authorities want to make shadow banks more resilient to prevent a cash crunch mutating into a full-blown crisis. Central bankers are pushing for action because they might otherwise have to pump in public money to calm things down — at a time when they’re eager to do the opposite: step back from markets.

There’s a divide over how far to go. While central banks want to transfer similar safeguards already in existence in the banking system — such as cash buffers — over to the shadow banking sector, markets regulators prefer more bespoke options.

As Ross said, it's not the case that one size fits all.

“It is to my mind not necessarily the right approach to just say because we have measure X in the banking sector or measure Y in the insurance sector, you should have the same necessarily in another sector," she said. "You need to look at what actually makes sense in the individual area and sector that you are dealing with."

Still, there is common ground over the need to firm up what tools are available in a crisis — like penalizing investors rushing to get their cash back quickly — and preferably before something else goes pop.


We're not banks


For its part, the fund industry is fiercely resistant to any reforms that would force them to hold buffers like banks, and is wary of being lumped together with other parts of the shadow bank sector.

But even it recognizes the problem.

“Do I think that there’s a risk of accidents in the nonbank sector broadly? I would say, yes, I do. Any time you have such a lengthy period of stimulative interest rates and stimulative fiscal policy, and then you come out of it, you’re going to see that,” said Michael Pedroni, chief global affairs officer at ICI, which represents the global fund industry.

In the EU, there’s a debate underway over how prescriptive to be on the tools available in a key piece of fund legislation, and to improve data and reporting to the authorities.

“We need to get our house in order in the EU,” said Ross. "On the other hand, we need to be conscious that we live in a global financial system.”

Comments

Oh ya 2 year ago
The government needs to get out of bailing shadow banks and regular banks out. If they fail let the chips land were they be.

Newsletter

Related Articles

0:00
0:00
Close
US Treasury Secretary Calls for Institutional Review of Federal Reserve Amid AI‑Driven Growth Expectations
UK Government Considers Dropping Demand for Apple Encryption Backdoor
Severe Flooding in South Korea Claims Lives Amid Ongoing Rescue Operations
Japanese Man Discovers Family Connection Through DNA Testing After Decades of Separation
Russia Signals Openness to Ukraine Peace Talks Amid Escalating Drone Warfare
Switzerland Implements Ban on Mammography Screening
Japanese Prime Minister Vows to Stay After Coalition Loses Upper House Majority
Pogacar Extends Dominance with Stage Fifteen Triumph at Tour de France
CEO Resigns Amid Controversy Over Relationship with HR Executive
Man Dies After Being Pulled Into MRI Machine Due to Metal Chain in New York Clinic
NVIDIA Achieves $4 Trillion Valuation Amid AI Demand
US Revokes Visas of Brazilian Corrupted Judges Amid Fake Bolsonaro Investigation
U.S. Congress Approves Rescissions Act Cutting Federal Funding for NPR and PBS
North Korea Restricts Foreign Tourist Access to New Seaside Resort
Brazil's Supreme Court Imposes Radical Restrictions on Former President Bolsonaro
Centrist Criticism of von der Leyen Resurfaces as she Survives EU Confidence Vote
Judge Criticizes DOJ Over Secrecy in Dropping Charges Against Gang Leader
Apple Closes $16.5 Billion Tax Dispute With Ireland
Von der Leyen Faces Setback Over €2 Trillion EU Budget Proposal
UK and Germany Collaborate on Global Military Equipment Sales
Trump Plans Over 10% Tariffs on African and Caribbean Nations
Flying Taxi CEO Reclaims Billionaire Status After Stock Surge
Epstein Files Deepen Republican Party Divide
Zuckerberg Faces $8 Billion Privacy Lawsuit From Meta Shareholders
FIFA Pressured to Rethink World Cup Calendar Due to Climate Change
SpaceX Nears $400 Billion Valuation With New Share Sale
Microsoft, US Lab to Use AI for Faster Nuclear Plant Licensing
Trump Walks Back Talk of Firing Fed Chair Jerome Powell
Zelensky Reshuffles Cabinet to Win Support at Home and in Washington
"Can You Hit Moscow?" Trump Asked Zelensky To Make Putin "Feel The Pain"
Irish Tech Worker Detained 100 days by US Authorities for Overstaying Visa
Dimon Warns on Fed Independence as Trump Administration Eyes Powell’s Succession
Church of England Removes 1991 Sexuality Guidelines from Clergy Selection
Superman Franchise Achieves Success with Latest Release
Hungary's Viktor Orban Rejects Agreements on Illegal Migration
Jeff Bezos Considers Purchasing Condé Nast as a Wedding Gift
Ghislaine Maxwell Says She’s Ready to Testify Before Congress on Epstein’s Criminal Empire
Bal des Pompiers: A Celebration of Community and Firefighter Culture in France
FBI Chief Kash Patel Denies Resignation Speculations Amid Epstein List Controversy
Air India Pilot’s Mental Health Records Under Scrutiny
Google Secures Windsurf AI Coding Team in $2.4 Billion Licence Deal
Jamie Dimon Warns Europe Is Losing Global Competitiveness and Flags Market Complacency
South African Police Minister Suspended Amid Organised Crime Allegations
Nvidia CEO Claims Chinese Military Reluctance to Use US AI Technology
Hong Kong Advances Digital Asset Strategy to Address Economic Challenges
Australia Rules Out Pre‑commitment of Troops, Reinforces Defence Posture Amid US‑China Tensions
Martha Wells Says Humanity Still Far from True Artificial Intelligence
Nvidia Becomes World’s First Four‑Trillion‑Dollar Company Amid AI Boom
U.S. Resumes Deportations to Third Countries After Supreme Court Ruling
Excavation Begins at Site of Mass Grave for Children at Former Irish Institution
×