If the headline doesn’t make sense to you, you are not alone. Shadow banking is the term given to any institution lending money in the guise of leasing, finance or cash advances that is not a bank under the general definition. You don’t need a banking licence to be a lender. I’ve acted as a finance provider in the past both secured against assets and on an unsecured basis. This isn’t the same as lending one of your friends £10, it still has legal entity framework requirements but the overall term captures such a broad spectrum of organisations, that when it actually makes the headlines such as now, you know it is serious.
India has made the headlines as its shadow banking crisis has been cited as the reason for a complete slowdown almost complete stop to the new car / bike market. India has seen a massive boom of automotive output in the recent past, primarily for the domestic market. The banks were not the reason for easy credit, the shadow banks were. Another good example of Shadow Banking is manufacturer finance. Some of these are operated and owned by banks as a white label, but others are genuinely a book of debt owned and operated by the originator.
What’s the big deal? Well, if you don’t fit the criteria for the banks, the shadow banking industry is where you will obtain credit usually. If this marketplace is disrupted, the impact on the entire industry will be seismic. Shadow banks rely on smaller institutes giving them money to lend out, when there is uncertainty in the future marketplace, these institutes and investors are off like a prom dress. If you have sufficiently diluted your sources of capital to the point where you can afford to lose one or two of these as part of your portfolio, you may increase your rate of interest to make your offering to investors more attractive, but there comes a point where the gap between banks and shadow banks makes a noticeable gap between the two.
In the UK and US shadow banks are obliged to operate under the same terms as big banks, and the investor greed means they are keen to write business to the point they will complete for customers of questionable value from a risk perspective.
Here comes the fly in your wine glass; lenders are like meerkats. One senses peril and they all run for the hills. The vicious cycle is complete when those that stay only do so because they are charging enough to make it economically viable.
If the money is expensive, then the asset needs to be cheap, and it goes without saying, you should only borrow what you need. This means in times of uncertainty, the most efficient choice is a lease agreement where you are only liable for the rentals during the period of hire and you would be advised to pick a car with solid residual values as the lenders will be happier with these on their books than things we consider left-field.
Imagine being the lender with 1000’s of MG Rovers on the books at the point of collapse. Then multiply that by 10 and you get the idea of how much dieselgate affected the lenders against VW Audi. It’s not about being smug, it’s about remaining informed. This is why Kappa car leasing look to the future and past when deciding what makes the most sense right now.