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Loosened regulations cause capital undercurrents, threatening economyDefined as the credit activities which occur outside banks, shadow banking has become a new big threat.

The East Asia financial stability conference which has just finished in Hanoi spent much time on the discussion on “shadow baking,” a matter of great interest of the international finance market after the collapse of Lehman Brothers which has led to the 2008-2009 global financial crisis.

Dr Vu Viet Ngoan, a well-known Vietnamese economist, warned that this could be the origin of a next crisis.

Shadow banking is understood as the conduct of banks shifting from mobilizing capital from the public and businesses to mobilizing from investment funds, insurance companies or issuing financial papers. The sums of money later are used to buy some kinds of securities with high safety levels (such as government bonds).

The fact that non-bank credit institutions mobilize capital and then relend to others, or provide other services like a bank, has created high risks in the system. This is the matter of biggest concern of experts.

The shadow banking activities in Asian countries, including China and Vietnam, also comprise of other unofficial transactions, such as black credit or pawning, which remain uncontrollable to state management agencies.

A report released in mid-November 2012 by the Financial Stability Board (FSB) showed that the total transaction value of the underground market reached 67 trillion dollars. This is a huge sum of money which is higher than the total GDP of the 20 biggest economies in the world.

However, the figure is not a surprise at all, if noting that in 2007, it was 62,000 billion dollars already, which was double that of the five years before.

The US is believed to be the economy with the biggest shadow banking system, worth 23 trillion dollars, while the figures are 22 trillion dollars in the euro zone and 9 trillion dollars in the UK.

In Vietnam, economists say, the biggest threat is that the underground banking activities may cause the interactive risks between the stock market and the banking system.

According to Deputy Chair of the State Securities Commission (SSC) Nguyen Doan Hung, the securities companies in Vietnam have been carrying out a lot of operations which have the same characteristics as credit activities.

Repo is a typical example. The service, by the nature, is that securities companies lend money to investors to fund securities investments. The operation, which is similar to the banks’ lending, has not been put under a strict control.

Hung has warned that the cash volume lent by securities companies to investors through repo service is “relatively big,” which may become uncontrollable one day.

The operation of securities companies to lend to investor through financial leverage is also believed to have latent risks, even though it bears the strict control as stipulated in the law on credit institutions.

Besides, the zigzag path of the cash flow which is remitted from banks to securities companies, then to investment fund management companies and to other companies also makes it more difficult to control.

Not only the securities market, the shadow banking, in many cases, affects the operation of orthodox banks.

Nguyen Chi Hieu, a member of the board of directors of a well-known bank in Vietnam, said his bank always receives the proposals to issue assurance certificates.

In these cases, a business or an institution would come forward and lend to a borrower, if the bank accepts to issue assurance certificate. Meanwhile, this is really a risky thing.

(Vietnam Net)

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