Shadow Banking Grows to $75 Trillion Industry, FSB Says

The shadow banking industry grew by $5 trillion to about $75 trillion worldwide last year, driven by lenders seeking to skirt regulations and investors searching for yield amid record low interest rates.

The size of the shadow banking system, which includes hedge funds, real estate investment trusts and off-balance sheet investment vehicles, is about 120 percent of global gross domestic product, or a quarter of total financial assets, according to a report published by the Financial Stability Board today.

Shadow banking “tends to take off when strict banking regulations are in place, when real interest rates and yield spreads are low and investors search for higher returns, and when there is a large institutional demand for assets,” according to the report. “The current environment in advanced economies seems conducive to further growth of shadow banking.”

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 clampdown and cause risks to build up out of sight of regulators. The FSB published guidelines for supervisors last year to keep track of the industry.

“Risks can migrate outside of the core and as a result, the FSB’s shadow banking monitoring exercise is of the utmost importance,” Agustin Carstens, who heads up the FSB’s risk assessment committee, said in the statement.

The FSB, a global financial policy group comprised of regulators and central bankers, found that shadow banking increased most rapidly in Argentina, which saw a 50 percent jump, and China, where growth was more than 30 percent.

The global share of activity based in the U.S. declined to 33 percent last year from 41 percent in 2007, according to the report, while the proportion of shadow banking based in China rose to 4 percent from 1 percent.

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