Shadow Banking Grows 10% Driven by Lenders in China and Ireland

  • Global regulators release narrower `shadow bank' definition
  • Shadow banking assets continue growth as banks retrench

The global assets of the shadow-banking industry grew by $1.1 trillion to about $36 trillion last year, outpacing banks and other financial institutions and driven by growth in the U.S., China and Ireland, according to the Financial Stability Board.

QuickTake Shadow Banking

Shadow-banking assets, captured under a new narrower definition designed to better isolate institutions that pose risks to the financial system, amount to 59 percent of gross domestic output and 12 percent of all financial assets in the 26 countries participating in the FSB’s annual survey, the Basel-based regulator said on Thursday.

“Non-bank financing provides a valuable alternative to bank funding and helps support real economic activity,” the FSB said in the report. “However, if non-bank financing is involved in bank-like activities, transforming maturity/liquidity and creating leverage like banks, it can become a source of systemic risk.”

While regulators 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 clampdown and cause risks to build up out of sight of regulators. The Group of 20 nations asked the FSB to keep track of the industry and develop rules to keep it in check.

Determining the size and scope of the industry is one key aspect of that task, as centrally collected and well defined data aren’t as readily available for this lightly regulated sector. The FSB said it whittled down the data using five economic “functions” as identifiers to improve its grasp of shadow banking. The biggest group in the newly defined sample is funds such as fixed income or credit hedge funds that have “features that make them susceptible to runs,” it said.

Compared with the broader definition it used in previous years, the FSB now excludes equity investment funds, funds that don’t use debt to enhance earnings and entities that are owned and reported by banking parents, the regulator said. Under the old, broader definition, non-bank assets rose to $68 trillion last year in the 26 countries covered, up 9 percent if adjusted for currency effects.

While the overwhelming majority of shadow banking assets are based in developed economies, led by the U.S. with 40 percent of the total, the U.K. with 11 percent and Ireland with 8 percent, growth is driven by emerging markets. Their share doubled since 2010 to 12 percent last year, driven mostly by China, the FSB said.

The FSB issued a new set of rules for securities financing transactions on Thursday. It will evaluate the need for developing new policy recommendations and report its findings to the G-20 in the first half of next year, it said.

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