The necessary rise of alternative lenders in Europe

Christian Faes, managing director Montello Bridging Finance, and asset manager of the Montello Income Fund says continued global economic recovery will very much depend on the continued rise of non-bank lenders.

Non-bank lending entities have a very positive and important role to play in the economic recovery. Some commentators have attributed the nascent recovery in the US economy to the vibrancy of their non-bank lending market.

With the swath of banks that have gone into bankruptcy, ceased new lending, or otherwise significantly constrained their lending activities, other lenders are starting to fill the void in Europe. Obviously for economies to grow, the companies within those economies need to grow, and leverage is an important ingredient in that equation.

With the vast number of lenders that have left the market, new alternative lenders coming into the marketplace should be encouraged. The alternative lending market in Europe is far less developed than it is in the United States. It is said that in the US approximately 80% of all corporate borrowing comes from non-bank debt – whilst in Europe, this is said to be about 30%.

The definition of a ‘shadow bank’ is almost as opaque as the definition is misleadingly pejorative. Paul McCulley from PIMCO is widely recognised as the person that originally coined the phrase ‘shadow banks’ and at the time described them as “the whole alphabet soup of leveraged up non-bank investment conduits, vehicles and structures”. Needless to say it is a wide-ranging definition.

It was recently reported that the new chair of the global Financial Stability Board (FSB), Mark Carney, has said that participants in the ‘shadow banking’ market should be brought within the regulatory framework of global markets.

The FSB’s definition of the shadow banking system being particularly broad, as “credit intermediation involving entities and activities outside the regular banking system”.That is, their initial view is that regulation should be dramatically increased for these lenders. The FSB is tasked by the G20 with the aim of preventing a repeat of the 2008 financial crisis.

The recent comments on the shadow banking market,view that market as a potential systemic threat to the global financial system moving forward. However, it has also been acknowledged by the FSB that it is a ‘valuable building block’ to financial stability – which should be encouraged as a positive view.

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