Playing the Shadowy World of Emerging Market Shadow Banking

Abstract

For emerging market regulators, shadow banking represents an activity which they must control. For businessmen in economies like Russia, Argentina, Saudi Arabia and Mexico, shadow banking represents an important business opportunity. By extending credit to risky (but promising) activities through shadow banking, financiers in these economies can earn far higher returns for excess-cash than placing it in cash management accounts. In this brief, we describe ways that cash-rich individuals and companies can use shadow banking activities to help themselves (by earning more money) and help the economy (by extending credit in these traditionally credit-starved economies). Some of these activities include issuing debt which shadow bankers use as collateral, chopping project-lending into privately-placed share offerings, investing in trade, real estate and insurance securities as well as centring shadow banking activities in regulation-friendly jurisdictions.