How JPMorgan Unbanked the Shadow Banking Industry | QPOL Issue #43
Wall Street banks are the new sheriff in town for private markets. Here's why.
A recent article last week went under the radar that I feel needs much more attention paid to it. It was titled “JPMorgan, Goldman Plan to Start Trading Private Credit Loans”
What exactly does this mean and what are the possible repercussions?
In short, the piece explains that Wall Street banks like JPMorgan are wanting to get into the business in lending to the secondary private markets. Such lending is currently done by “shadow banks” like PE firms (private equity), and other “shadow” institutions in the private markets.
Shadow Banking 101
Although it sounds sinister, shadow banking is simply financial institutions performing bank-like activities without technically being classified as banks. Joseph Wang explains this in detail in his book Central Banking 101. Institutions that make up the shadow banking sector include ETFs, REPOs, MMFs, Primary dealers etc. They conduct bank-like activities without being a chartered bank because they don’t hold customer deposits. They usually just lend out money that’s borrowed from investors (like even other shadow institutions such as PE firms), and might pay back those loans with over-night REPO loans from the REPO facility (also a shadow institution).
Shadow banks are seen as intermediaries between financial outfits rather than banks, and are involved with as much if not more credit creation than banks themselves. To paint the picture, the non-banking financial system is liable for $220 trillion, why the actual banking financial system is responsible for $180 trillion… Although the Fed’s policies impact the shadow banking system (like raising rates), it’s important to note the shadow banking system (including the offshore dollar system/ODS) is still a system completely outside the purview and authority of the Federal Reserve System itself.
The Why
So why would JPM want to get involved in this market (other than the obvious lucrative reasons)? It almost seems this is JPM marking their territory and replacing Black Rock and other shadow institutions in the shadow banking sector. The primary member banks are Instead of paying hefty penalties to bail out the regional banks (as stated in the BTFP), they’ll just lend to them (the smaller banks) and pocket the interest. To me, this almost reads like the Major banks like JPM are creating their own discount window for the regional banks.Instead of being penalized and paying higher fees to bail out a smaller bank if they go tits up, they can instead just lend to them instead and pocket the interest.
The article expresses this sentiment as such:
Should market making take off, the likely windfall would help ease the sting for banks that have seen direct lending increasingly supplant the fee-rich high-yield bond and leveraged loan deals that until recently generated about a third of Wall Street’s investment-banking revenue.
“Banks want to trade it and make fees, and funds want to” have the option to exit positions, said Elaine Stokes, a portfolio manager at Loomis Sayles & Co.
This would also give the likes of JPM a strangle hold over the ability of shadow operations like Blackstone etc. to get involved.
All According to Plan
This is just team Fed controlling monetary policy and preventing it from causing chaos as the shadow banking sector always has. Just as SOFR replacing LIBOR isn’t ending the Eurodollar system, it’s merely placing its control in the hands of the domestic players of US monetary policy. After all, this is “Private Equity Powell” running the Fed here. All that is happening is the some of regulatory oversight by the major capital creators and managers.
It’s JPM et.al controlling the shadow banking sector and preventing another SVB from forming while also protecting the regional banks and maintaining confidence in the US financial system under the hood without needing a Fed/USG bailout. Basically, they’re market making the eurodollars away and they’re the ones most qualified to do it because, well, they’re actual banks…
Ultimately, this action by the banks is telling you that Powell is putting the power to create and lend money back into the authoritative hands of the banking sector where it rightfully belongs.
~ Phil Gibson
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