Saturday 3 December 2016

Beware of hedge funds bearing gifts, the easiest way to rob a bank is to run one

Published 30/07/2014 | 02:30

The Central Bank has announced that hedge funds will be allowed to lend. Photo: PA
The Central Bank has announced that hedge funds will be allowed to lend. Photo: PA

A "shadow banking system" is being constructed in Ireland. It has enormous potential to torpedo the future growth path and risks another banking crisis in time.

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The term shadow banking system was coined by my former boss, the economist Paul McCulley, to describe the activities of all sorts of funds that are in his words "a whole alphabet soup of levered-up investment conduits, vehicles and structures". The term perfectly captures the nature of a business, which significantly contributed to the global economic crisis.

A shadow banking system is a parallel banking system. It behaves like a banking system but it's not. It is all sorts of investment funds which lend money. But the institutions aren't places you go into with your deposit and open an account. A shadow banking system manages to get finance in other ways and then lend this money into the economy

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