A friend pointed me to an interesting new book recently, “Inside China’s Shadow Banking: the Next Subprime Crisis”. This is written by an investment banker turned shadow banker, Joe Zhang. His anxious nine year old asked him if he was going to become a “small loan shark” in this transition. The book is a fascinating account of businesses that operate at the periphery of the banking sector in China and the consequences of prolonged negative real rates of interest combined with a banking sector subject to stringent licensing (sound familiar?).
This book also got me thinking how the term “shadow banking” has acquired so much currency in recent years since the US credit crisis. This rather unflattering term is used to refer to an entire spectrum of financial firms including hedge funds on the one end in the US and unlicensed deposit-takers like Saradha Chit Fund in India and micro-credit firms in China on the other. Irrespective of exact identity, being a shadow bank clearly connotes weak to non-existent regulation and risks to customers. A throwback to Shylock, if you will.
Above excerpt is cross-posted from Bindu Ananth’s latest column on the Forbes India Blog. Click here to read the full post.