BREAKINGVIEWS-The Week in Breakingviews: Too big to fail again

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Peter Thal Larsen

LONDON, April 12 (Reuters Breakingviews) - Welcome back! A week that started with Donald Trump threatening to destroy a “whole civilization” ended with peace talks in Pakistan and Iran charging tolls in the Strait of Hormuz. I’m taking a break from the conflict to write about another looming fight: over shadow banks. Let me know what else we should be paying attention to. If this newsletter was forwarded to you, sign up here to get it in your inbox every weekend.

OPENING LINE

“Simply stating the facts is enough to make clear how absurd things have become at Banca Monte dei Paschi di Siena: shareholders must pick a new CEO who has ​never run a mainstream bank before, or the lender’s fired ex-boss.”

Read more: Rebel CEO is a rational vote in Italy’s bank drama.

FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK

1. Carlsberg’s share of India’s beer market has risen to 22%, from just 5% in 2011. (Indians are sinking more suds)

2. Satellite operator EchoStar SATS.O swapped spectrum for SpaceX stock worth $11 billion last year. It’s now worth three times as much. (The only way is down)

3. Shares in Japan’s Seven & i 3382.T are 20% below Canadian rival Couche-Tard’s ATD.TO offer last year. (Time for another round)

4. An Australian data centre operator borrowed for 100 years. (But probably not)

5. Registration of new Tesla cars in France tripled in March. (Gas guzzlers are out)

SHADOW BOXING

Here’s a potted history of financial regulation over the past 15 years: After 2008, watchdogs tightened capital and liquidity rules to prevent big banks from ever threatening the global economy again. To the surprise and consternation of some bank CEOs, this effort broadly succeeded. Entire chunks of financial activity, including proprietary trading in bonds and equities and lending to riskier borrowers, migrated from regulated institutions into shadow banks, or what policymakers now prefer to call non-bank financial intermediaries.

The shift was expected, and deliberate. Regulators reasoned that non-banks which got into trouble would pose less of a threat to the economy and therefore be less prone to seeking politically toxic bailouts. Over the last decade and a half, however, several things have changed. The first is that non-banks have grown much bigger: they now account for more than half of the roughly $500 trillion of financial assets in existence around the globe, according to the Financial Stability Board. The second is that they have moved closer to the heart of the financial system. Companies like Citadel Securities, Apollo Global Management APO.N and Stripe are not regulated banks, but still play key roles in making markets, allocating capital, and processing transactions.

Up to this point, bankers and regulators agree. Where they diverge is over what to do next. Many bank executives argue that some of the regulations introduced since 2008 should be modified, enabling them to grab back lost business or take advantage of new opportunities. JPMorgan JPM.N boss Jamie Dimon this week singled out the “GSIB surcharge”, which imposes an extra capital requirement on the world’s biggest banks. The proposed charge, he wrote in his annual letter to shareholders, seems to punish “our success, our strength, our consistency and our balanced business model. Frankly it’s not right, and it’s un-American.” It’s a rare post-2008 example of a top banker publicly making the case that big is better.

Regulators take a different view. They point to the relative stability of big banks in the last six turbulent years as a sign of success. As Klaas Knot, the former head of the Dutch central bank, told me this week, 2008 showed that bank exposures, which may seem diversified in calm times, tend to become highly correlated in a crisis.

Watchdogs would therefore prefer to tighten up oversight of non-banks, to avoid remaking the drama of 2008 with a different set of villains. A working group organised by the Group of Thirty former regulators and central bankers, chaired by Knot and Agustin Carstens, the former head of the Bank for International Settlements, this week warned of a brewing “perfect storm” in the non-bank sector. Their report cites two specific concerns: the central role played by hedge funds and others in government debt markets, and the rapid growth of private credit providers in lending to companies. Both groups also tend to have extensive links to regulated banks.

The coming battle in financial regulation is therefore whether to raise the playing field for non-banks, or to lower it for traditional lenders. The shape of the next meltdown will depend on who gets the upper hand.

CHART OF THE WEEK

The sums earmarked to build data centres around the world are so vast they can be hard to put into context. Nvidia NVDA.O boss Jensen Huang reckons it costs $60 billion to $80 billion to build a 1 gigawatt facility. With more than 100 GW of projects already in the planning stages, the implied outlay is at least $6.6 trillion. Is it possible to finance construction on such a scale? Jeffrey Goldfarb added up the numbers and reckons there’s $7.5 trillion available. Spending it at high speed is a different challenge, though. The U.S. interstate highway system, which cost a mere $500 billion in today’s money, took three decades to complete.

THE WEEK IN PODCASTS

Ransomware has become a large and lucrative global industry: half of all businesses with $10 million or more of turnover have suffered an attack on their computer systems in the past year. On The Big View this week I talked to Anja Shortland, professor of political economy at King’s College London and author of “We Know You Can Pay a Million”, about why the business has boomed, and the fresh threats posed by new artificial intelligence and geopolitical conflicts.

Over in the Viewsroom, Aimee Donnellan and Jonathan Guilford talked to Neil Unmack about the dramatic corporate moves by global food groups, exemplified by Unilever ULVR.L and U.S. rival McCormick MKC.N creating a $65 billion mayonnaise-to-mustard giant.

PARTING SHOT

The upsurge in Japanese takeovers has been one of the most striking recent developments in corporate finance. After decades in the doldrums, Japanese companies have started prioritising returns to shareholders, under pressure from the government, activist investors, and hostile suitors. Now a seemingly benign directive from Japan’s Ministry of Economy, Trade and Industry threatens to derail the M&A bonanza. Hudson Lockett explains why an instruction for companies to prioritise “corporate value” may be something of a poison pill.

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(Editing by Liam Proud; Production by Oliver Taslic)

((For previous columns by the author, Reuters customers can click on LARSEN/peter.thal.larsen@thomsonreuters.com))