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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°144 ▪ 4th May 2018


The other side of the financial market

The shadow market (or the marked-based financing) is a term used to talk about credit operations that occurs beyond the regular banking system. Nevertheless, some analysis has used it to describe the dark side of the financial system before the 2007-2008 global financial crisis (GFC).

In fact, shadow banking has been growing in recent years. According to the Financial Stability Board (FSB), marked-based funding has increased to reach 48% of the total global financial assets of financial institutions in 2016, which denotes its importance. Marked-based funding is larger in the United States than in the European Union and its importance has caused many debates. Beyond the discussion about its benefits or disadvantages, one important point is that it represents an alternative source of funding for enterprises.

After GFC, governments of the European Union have tried to incentivize the economy through the reinforcement of private investment. For instance, the Juncker Plan intends to allocate EUR 500 billion until 2020 to promote industrial projects and to reinforce innovation in Small and Medium Enterprises (SMEs). Another example is the PACTE law in France, which looks to facilitate funding for SMEs. Furthermore, the new institutional infrastructure of the French Public Investment Bank (BPI) highlights the efforts made by governments to support French innovative companies.

Credit to private non-financial sector in Euro Area

Sources: Beyond Ratings, BIS

In this regard, the last financial stability review of the Banque de France steers the debate around the shadow banking system. It argues that given the context, the increase of shadow banking funding gives more opportunities to enterprises by diversifying its risk and by moving resources to investment in innovation which is an important determinant of growth in advanced economies.

The December 2017 reform of the well-known Basel III international regulatory framework for banks, focuses more on the liquidity of the non-banking funding more than on the sustainability of the banking system. The excess of liquidity of the banking system and an increased demand for non-banking resources challenge policy makers and international institutions to rethink the regulatory framework of this “shadow” part of the economy that it is not well regulated.

Features of financial markets are now different. On one hand, companies in the Eurozone prefer to save and to fund using their own resources (cash flow) or by private equity, meaning that they are not using the regular banking system. On the other hand, excess of savings in the banking system is allocated to public debt and financing the increasing public deficit. Thus, the main impact remains on the intensification of the vicious circle between banking risk and sovereign risk. If private banks concentrate their portfolio on sovereign debt securities, the banking risk would increase and then affect public financial stability.

This situation is also critical in terms of the transmission mechanism of the monetary policy, since the link between household’s savings and companies is disrupted, a change in the interest rate has virtually no effect on the cost of companies’ funding.

Finally, it is important to understand that the non-banking system is a counterpart of the banking system that changes the macro financial equilibrium and there is a necessity to better regulate it to prevent potential systematic risk.

Gabriela Aguilera-Lizarazu, Analyst



Sovereign Risk

The economic growth is eroding in the Eurozone

According to a first estimate released on Wednesday the 2nd of May by Eurostat, the Eurozone economic growth sharply slowed in the first quarter of 2018, standing at +0.4 %, vs. +0.7 % in the fourth quarter of 2017 but Eurostat does not detail the components of this figure in its first estimate. This slump in economic growth confirms the European Central Bank (ECB) fears, as stated last Thursday, a shortness of breath in the Eurozone recovery, after several quarters of higher than expected economic growth.

At the end of the day, this slowdown was expected by the markets and the European Commission still expects economic growth at +2.3 % this year and +2.0 % in 2019. At a time when the United States has begun a standoff with China and plans to raise their trade tariffs on steel and aluminium. Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, believes that “the biggest risk to this optimistic outlook is protectionism, which should not become the new normality”.

Julien Moussavi, Head of Economic Research  –  Sources: Beyond Ratings, national sources


The Fourth Estate is under attack

2018 World Press Freedom Index

On the 16th October 2017, Daphne Caruana Galizia, a Maltese journalist activist, was killed in a car bomb attack assumedly in relation to her anticorruption activities and her blog in which she revealed sensitive information about Maltese politicians. She was one the 46 journalists killed in 2017 due to their job as reported by the Committee to Protect Journalists (CPJ).

This is critical as press and (independent) media make up the Fourth Estate, which checks the influence of the three formal powers (legislative, executive and judiciary) of a society. The Fourth Estate provides alerts of power misuses (corruption, personal enrichment, conflicts of interest, collusion, etc.), which allows citizens to adjust their votes accordingly.

Such murders (highly correlated with the Press Freedom Index from Reporters Without Frontiers) reflect poor levels of democracy and high levels of corruption. But the vitality of the Fourth Estate is also threatened in developed countries, where the press is mainly owned by large multinational groups, creating a justified risk of partiality (either by self-censorship of journalists or by direct orders from the owner regarding editorial lines and article content). Lastly, press subventions are decreasing, augmenting its dependency to advertisers and limiting its freedom.

As a result of these threats, what remains of the “independent” press have created consortiums to share costs and risks amongst newspapers, countries and journalists. Such groups are like a hydra with many heads that can use the Internet to spread investigation results worldwide. Recent examples are the Panama/Paradise Papers where the International Consortium of Investigative Journalists (ICIJ) simultaneously treated high quantities of information, or the Forbidden Stories (a network of journalists whose mission is to continue and publish the work of other journalists facing threats, prison, or murder) that completed the Daphne Caruana Galizia investigation about Maltese corruption.

Emeric Nicolas, Head of Statistics  –  Source: Beyond Ratings, RSF, CPJ

Carbon/Climate Change

How long will you keep your mobile phone?

Year of age of various household goods in France (metropolitan)

A recent CGDD report analysed the relationship between the way of life of French people and their environmental practices and behaviours. And although it focuses on France, several of its conclusions can be of interest for the analysis of other countries.

Among interesting conclusions, it observes for example a gap between the will to act and actual behaviour. As illustrated in today’s graph, it also observes how short the year of age of some household goods can be. For example, no less than 80% of mobile phones are below 3 years of age and more than 60% of television sets are below 5 years of age. Of, course this reflects in part the fact that part of the population regularly buys such goods for the first time to get equipped or has to replace it after a long period of use.

However, these figures also tend to reveal two additional elements: on the one hand household goods may become obsolete more and more quickly (especially when it is built-in), and on the other hand consumer behaviour is more and more oriented towards a more and more frequent replacement of goods. Mobile phones are a good example of that. An issue of this is however the environmental consequences. New goods may be more energy-efficient, but replacing such goods more often can have notable carbon costs given the emissions required for their production.

Guillaume Emin, Project Manager  –  Sources: Beyond Ratings, CGDD/SDES (Epem 2016)


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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via; Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)


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