Shadow Banking Grows to $71 Trillion Industry, Regulators Say

The shadow banking industry grew to about $71 trillion, an increase of $5 trillion in 2012, even as it shrank in the U.K. and the Eurozone, the Financial Stability Board said.

The U.S. share of the shadow banking system, which includes money market funds and off-balance sheet investment vehicles, grew 2 percent to 37 percent, the Basel, Switzerland-based FSB said in a report on its website yesterday. Activity in the U.K. and Eurozone decreased 4 percent to a 43 percent share.

While watchdogs have reined in excessive risk-taking by banks in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008, they are concerned that lenders might use shadow banking to evade the restrictions. The FSB, a global financial policy group comprised of regulators and central bankers, found in a report released last year that shadow banking grew by $41 trillion between 2002 and 2011.

“Improving bank regulation is not enough to fully address the weaknesses of the financial system revealed by the crisis,” Agustin Carstens, governor of the central bank of Mexico, said in an e-mailed statement. “The shadow banking system continues to transform and innovate.”

Supervisors consider shadow banking activities to be those that allow banks to carry out business off balance sheets, as well as those that give investors an opportunity to bypass lenders and the functions they traditionally fulfill on the markets.

“Our aim is for shadow banking to deliver transparent and resilient market-based financing, thus diversifying the sources of financing of our economies in a sustainable way,” Mark Carney, chairman of the FSB and governor of the Bank of England said in an e-mailed statement.

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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