Christmas Special: Beach Shadow Banking
Peter Barkow | For updates on real estate and corporate finance sign up >> HERE.
As corporate finance advisor and ex equity research analyst for real estate, banks and quite a few other sectors I have long thought to cut my analytical teeth into the shadow banking sector. After all I had already heard a lot about the dangers of the dark side of the financial system represented by so called shadow banks. Especially, when the sector helped preventing a credit crunch in the aftermath of the Lehmans desaster …
The place, where I have got personally exposed to the shadow banking sector, couldn’t have been more surprising and exotic:
Lovely Chowara beach in Kerala, South India (see pic below). Most of us will have experienced that quite a few fellow local salespeople pursue their business on beaches selling all sorts of things. I personally take less interest in their offering, as I struggle to find a fair clearing price for their merchandise. Beach negotiation strategies are probably worth a separate blog post and I am definitely still open to advice …
Nonetheless, my girlfriend does take interest and so the sales process starts. But what do you as an eager salesperson if your prospective client does not have any cash on hand on Chowara beach? Well, you do what everyone else would do. You pursue a credit check on your future customer, which goes like that: Hm, fairly touristic look (funny hat, towels, swim suit), lives in a decent hotel (protected beach area), stays for a few more days (haven’t seen her before, part of a three weeks program) => probably worth a couple of Rupees. Then you become part of the shadow banking sector by offering a loan: ‘Buy now, pay tomorrow, ok?’
Neither have I investigated the standard risk costs for this kind of loan (I have tried asking though …), nor do I know whether the Bank of Idea has already identified the risk of beach finance to the global financial system, but I am sure regulation will hit shortly!
I know, of course, that beach salespeople are simply offering a kind of vendor loan and it is unlikely that they take deposits to fund it. Therefore, I understand, they will not fall into the shadow banking definition of regulators (see here). I wouldn’t rule out, however, that their business model evolves further and third parties will provide the funding for it in the future. And that would then finally be ‚beach shadow banking‘. Maybe, we will even see a crowdfunding or marketplace beach lending model.
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