Greensill Crisis Exposes Risks of Shadow Banking
Financial Times reported that revolutions in finance have a nasty way of ending badly, especially when they happen at breakneck speed and that the capacity
Financial Times reported that revolutions in finance have a nasty way of ending badly, especially when they happen at breakneck speed and that the capacity of shadow banking to spring more dangerous systemic shocks should not be underestimated. Greensill Capital went from nothing in 2011, when Mr Lex Greensill abandoned a big-bank career, doing global supply chain financing at Morgan Stanley and Citibank, to go it alone. By 2019 this upstart non-bank says it had extended USD 143 billion of financing to 10 million plus customers and suppliers in 175 countries. Its founder also notched up powerful contacts in government and hired former UK Prime Minister Mr David Cameron as an adviser.
In supply chain financing the face of the balance sheet conveys little about the nature of the risks being run. Supply chain financing is just a fancy modern name for the age old practice of factoring whereby suppliers sell at a discount the debts their customers owes them to a financier who collects the full amount in due course. Lex Greensill’s revolutionary innovation was to realise that these debts could be packaged into investment funds, much as the big investment banks turned subprime mortgages into securities before the 2008 financial crisis.
The investors, who were chiefly clients of Credit Suisse Asset Management and fund manager GAM, required Greensill to take out credit insurance to cover the debts. But, unlike the subprime mortgage lenders, Greensill continued to have skin in the game because it was exposed to first losses under an uninsured part of the fund. This insurance was an important safeguard for investors, not least because the portfolio was heavily concentrated. The Scope rating agency estimated in 2019, for example, that two-thirds of the German subsidiary’s loans originated from a single group of linked private companies.