Experts fret a looming liquidity crisis could be the next housing bust
It might be time to prepare for a liquidity crisis, Axios reports.
Balance sheets may be strong, but the heads of major banks have issued warnings that September's repo market shock may not have been a one-time thing. They're concerned it was the start of a wide-ranging liquidity shortage, reportedly resulting from "regulations, changes to market structure, and banks' desire to keep their reserve levels high."
One sector that appears to be particularly worrisome is shadow banking, which consists of firms that are not banks, but lend money to consumers for auto loans and home mortgages. Axios notes they aren't subject to the same regulations as banks.
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"Regulators have been very successful in distributing risk," said Ron O'Hanley, president and CEO of State Street. "It's now been very much deconcentrated. But it hasn't gone away; it's been moved."
Tim Adams, the president and CEO of the Institute of International Finance, made a comparison that's growing increasingly common whenever the state of the economy is discussed — he likened the situation to the market for mortgage-backed securities before the housing bubble burst in 2007. You know what happened after that.
"We used to make the same case on securitization of mortgages — that we could slice them and dice them and we distribute risk globally and it was a safer system because it was distributed," Adams told Axios. "We found out that wasn't necessarily the case." Read more at Axios.
