Eurodollar University WTF Just Happened to the Banking System?!
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Sep 25, 2025 Concerns are rising over the shadow banking system and its capability to mask financial vulnerabilities. The discussion dives into how shadow banks operate, particularly their funding models and the riskier borrowers they target. Recent liquidity issues exposed these banks during a crucial stretch in early 2023. Insights from S&P Global reveal increasing defaults and loose covenants, hinting at deeper credit problems. The implications for the overall monetary system could be significant, with the potential for systemic risk lurking beneath the surface.
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Shadow Banks Hide Credit Risk
- Shadow banks perform bank-like lending but rely on short-term wholesale funding instead of depositor money.
- Their offshore location and weak reporting create opacity that hides credit risk until stressed.
Bank Retreat Fueled Shadow Growth
- Regulated banks never fully recovered from 2008 and retreated into safest assets, leaving lending gaps.
- That retreat created opportunities for shadow banks to expand into riskier, underserved lending markets.
Clean Balance Sheets, Heavy Leverage
- Shadow funds offered 'clean' balance sheets to hold loans that regulated banks avoided.
- They rely critically on leverage and short-term funding like repo to redistribute ledger money globally.