Shedding Light on Shadow Banking

The last time people paid attention to shadow banking was when it was ripping the world apart. The 2008-09 global financial crisis, the worst since the Great Depression, was precipitated by a “bank run” that hit nonbank financial firms such as the Reserve Primary Fund money-market fund and American International Group, then the world’s largest insurer. Creditors accumulated chits that were unpayable by debtors, and the lack of government deposit insurance meant there was nothing to stop the creditors from panicking when the chits hit the fan.

What’s surprising is that four years after the crisis, shadow banking remains a huge force. According to a Nov. 18 report (PDF) by an international body of regulators, the Financial Stability Board, worldwide assets in shadow banking, ranging from money-market mutual funds to banks’ off-balance-sheet vehicles to credit derivatives, totaled $67 trillion last year. That’s higher than $62 trillion in 2007, the year before the crash. The U.S. accounts for 35 percent of that. The field has shrunk a bit as a share of the surveyed countries’ economies, to 111 percent from a peak of 128 percent, while remaining about half the size of the conventional banking sector, the board says.