Photographer: Simon Dawson/Bloomberg

Rise of Shadow Banks Is Amplifying Monetary Policy, IMF Says

  • Shadow banks tend to adjust balance sheets faster, IMF says
  • Risk taking playing growing role in monetary policy: IMF

The growing role of shadow banks in the global financial system is enhancing the potency of monetary policy, according to the International Monetary Fund.

Some economists have argued that the decline in traditional bank lending has dampened the impact of changes in interest rates by central banks. But in a paper released Thursday, the IMF said the opposite is true: the transmission of monetary policy actually appears to be slightly stronger in countries with large shadow banking sectors.

Insurers, pension funds and asset managers are often called “shadow” banks, because they aren’t regulated in the same way as deposit-taking institutions. Shadow banks -- or "non-banks" as the IMF refers to them -- have played a growing role in providing liquidity since the global financial crisis, as weakened balance sheets and tougher regulations have forced conventional banks to restrict lending.

Shadow banks tend to expand or contract their balance sheets more than traditional financial institutions in response to changes in monetary policy, said the Washington-based fund.

Asset-Firm Growth

The IMF noted the “remarkable” growth of asset-management firms since the financial crisis. Fund managers are rewarded based on their performance against their peers, making them especially sensitive to the direction of short-term rates, the fund said.

“As the size of the asset management industry grows, an increase is likely in the effect of monetary policy on asset prices,” the IMF said.

Regulators need to be vigilant about the potential impact of monetary policy on the financial soundness of banks and their shadow counterparts, the IMF said.

The study is part of the fund’s Global Financial Stability Report, to be released in full next week ahead of the IMF’s annual meetings in Washington.

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