Alternative finance
The recent collapse of alternative lender Greensill has thrust the spotlight firmly on non-traditional, less regulated financial services firms. But is shadow banking a dangerous dark art or a valuable cog in the financial services system? Words: James Tall
eventually be filed in history as a political story, there are plenty of financial and regulatory questions to be addressed before the involvement of a former prime minister and the lobbying of government are fully investigated. In early 2021, it became clear that Greensill Capital, a sizeable shadow bank that enabled businesses to borrow money to pay their suppliers, was struggling and on the verge of bankruptcy. The crisis deepened in March when BaFin, the German financial watchdog, banned Greensill Bank, the German subsidiary of Greensill Capital, from doing business – and reportedly filed a criminal complaint against its management. This followed a forensic audit in which BaFin raised concerns around bookkeeping, in particular for transactions linked to GFG Alliance Group, the famous steel empire headed by Sanjeev Gupta. In a statement, BaFin said: “Greensill Bank was unable to provide evidence of the existence of receivables in its balance sheet that it had purchased from the GFG Alliance Group. For this reason, BaFin has already taken extensive measures to secure the bank’s liquidity and to limit risks for Greensill Bank.” This was a critical blow to Greensill Capital, which counted former Prime Minister David Cameron as an adviser, and
it filed for insolvency on 8 March 2021. It was a crisis that has thrust the issue of shadow banking – or alternative lending – back into the spotlight, not least because the fallout has damaged traditional financial institutions, including Credit Suisse, which were doing business with the collapsed lender. According to the Financial Times, the Swiss bank, which had several ties with Greensill Capital, including $10bn worth of funds, reported a 78% fall in profits for the second quarter of 2021. As the shocks from the implosion continue to spread, many are questioning whether regulators will seek to get more control of a mode of lending that sits outside the main regulatory regime. Furthermore, the plight of Greensill Capital has raised concerns about the evolution of the global financial system in which alternative lending is a growing presence, and the ability of the regulatory authorities to keep up.
A PRESSING NEED FOR ALTERNATIVES There is no doubt that alternative lending has a crucial role to play in the financial services ecosystem. To give one example, it’s a necessary financial mechanism for SMEs that are struggling to cope in a tough economic climate. Alternative lenders played an increasingly vital role in delivering state-
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ALTHOUGH THE GREENSILL crisis may
Out of the 62 August - October 2021
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