The new normal – non-bank finance leading the way


Financier Worldwide Magazine

August 2013 Issue

August 2013 Issue

We all know that the problem with economics is that it’s man made and therefore prone to failure, sometimes on a catastrophic scale. Booms, busts, recessions, depressions and even the occasional bubble have left their trail of mayhem throughout economic history. But, look at history again, and we see that after any catastrophic event – take the London Blitz of 1940 or the Japanese tsunami of 2011 as examples – the landscape changes forever, rebuilt into something new, never duplicating what went before. 

Surely the same principle applies to the global economic landscape. This article surveys that landscape and introduces a new perspective on how the 2008 meltdown came about, and then attempts to shed some light on how the global capital markets are now rebuilding. This new landscape, now taking shape, has come to be referred to by the media and financial establishment as the ‘shadow banking sector’. Maybe because ‘shadow banking’ has a far more dramatic and sinister impact than boring old ‘alternative capital’ or ‘non-bank finance’, as those of us actually in the market prefer to call it. 


Received wisdom has it that in the wake of the 2008 meltdown the banks will recapitalise, those rescued by taxpayers will be privatised, the crisis will pass and, after a decade or so, everything will return to normal. 

This, you may recall, is the ‘normal’ where over a period of four decades or so, the demarcation between retail and investment banking became blurred to the point of obliteration and long-established, socially responsible mutual funds were swept up by the banks and all but eliminated. Institutions once supported by depositors’ money, augmented by the capital markets, slowly saw the balance of dependency reversed through ever increasing leverage. Depositors’ money was scattered across vast banking conglomerates which were, in turn, at the mercy of the global capital markets. Wrong, on so many levels. 

But let us revisit 2008 and see if those who told us the story (politicians, banks, regulators, et al) actually got it right. Because, when we look at all available data, a quite different (and perhaps more plausible) story emerges. 

Whilst the meltdown came in 2008, the Organisation for Economic Cooperation and Development (OECD) had already identified what they called the ‘global financial crisis’ in their 2006 Pensions Report (meaning the relevant data came to light in 2005 or before). Specifically, they referred to the migration of capital away from the traditional banking network and into hedge funds, family offices and other non-bank institutions. This, if taken in conjunction with research from the Financial Standards Board (FSB), was a migration that began as early as 2002. 

There were those within the global financial village who were flagging up their totally ignored concerns long before that – some as early as the late-1990s. Only those closest to the coming Armageddon could not see it. But isn’t that always the way? 

However, those who could see it – very clearly indeed – were those who actually owned a fair proportion of the world’s wealth. According to the 2007 Cap Gemini World Wealth Report, they were 9.5 million High Net Worth Individuals (HNWIs) owning $37.2 trillion between them at that time. Interestingly, the vast majority of HNWIs are successful, self-made entrepreneurs. These fortunate people share instincts that elude the rest of mankind and, instinctively, they began moving their money out of banks and into non-bank institutions, as the FSB research shows, as early as 2002. An accurate analogy would be that of wildlife sensing a coming tsunami, and moving to safe havens inland long before it arrives. 


The big concern for all of us though is the refusal of the financial establishment to accept that what they prefer to call the ‘shadow banking sector’, resourced predominantly with private money that has migrated from the banks, is actually a benign rather than malignant influence. For, despite all evidence to the contrary, the IMF, FSB and others have tried to lay the blame for the meltdown at the mythical shadow banking sector’s door. 

For instance, the FSB’s Global Shadow Banking Monitoring Report 2012 says that shadow banking “grew rapidly before the crisis, rising from $26 trillion in 2002 to $62 trillion in 2007”. Reinforcing this implication that shadow banking was in some way to blame for the crash, Yale professor Gary Gorton, an expert in financial panics, blatantly tells Barron’s (29 December 2012) that “the core of the meltdown, was the shadow banking system of non-bank firms”. Further, the IMF’s ‘Shadow Banking: Economics and Policy’ document (4 December 2012) says the sector “played a significant role in the run-up to the global financial crisis”. 

Usually it takes several decades or centuries for the revisionists to come out of the woodwork. These have taken just five or six years. 

Isn’t a more plausible explanation for the banking meltdown the fact that the people with the sense to see what was coming moved their money to safer (non-bank) havens? And not, as is being implied, some dark and sinister alchemy that conjured $62 trillion out of thin air? 

All this prompts an unsettling thought: had those HNWIs as well as, probably, many corporates, not moved their money out of bank deposits and into safer havens when they did, what would have happened to it when the subprime mortgage crisis, the catalyst for the meltdown, came along? Or, put another way, how many crises would it have taken for bonus-driven bankers, traders and derivatives creators to wipe out all private and corporate wealth deposited in their banks or leveraged into their trades? 


All misinformation aside, the reconstruction continues. Now, certainly at the major project finance level where deals are usually upwards of $50m and often north of $1bn, it is the non-bank finance sector leading the way. Funding structures, backed with private money, often providing 100 percent finance to seasoned management teams or companies with track record as debt or equity, are now commonplace. Often structured through hedge funds, asset managers or the raft of new ‘corporate only’ unregulated banks now starting to appear, the investment or lending decision is now driven by those who own the money.  

According to Bloomberg, the sector had grown to $67 trillion by December 2012 and no-one anticipates even a dime of it migrating back to the traditional banking sector. Also, the 2013 Cap Gemini World Wealth report found that the number of HNWIs had grown to 12 million with a record $46.2 trillion between them. We can safely assume that very little of that $46.2 trillion resides in the traditional banking network, and makes up the larger portion of Bloomberg’s $67 trillion valuation on the sector. We predict that, at the next count, the value on the so-called shadow banking sector will have gone above $70 trillion. Here on the ground, in the real world, there is a sense that we are witnessing the emergence of a new normal. 

Banks appear to be reverting to their traditional role of being simply the plumbing of the economy. We see those who actually own the money now setting about building a more responsive, responsible and risk-inclined capital market. There is no ‘grand plan’ or strategy in this. It is simply an evolution of private money doing private deals through private structures. The people who own the wealth taking direct responsibility for where and how it is deployed – sometimes through established investment or private banks, but increasingly through their own newly created non-bank institutions and structures. 

Surely, this is the new normal we’ve all been waiting for.


David G. Rose is the CEO of Equility Capital Ltd. He can be contacted on +44 1568 611 196 or by email:

© Financier Worldwide


David G. Rose

Equility Capital Ltd. 

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