[ZURICH] The value of non-bank "shadow banking" rose to some US$80 trillion last year, according to a report last Thursday by the Financial Stability Board (FSB), which advises G20 states on banking reform and oversees regulation of the global financial system.
The report, issued ahead of the G20s summit in Antalya, said shadow banking activities grew by US$2 trillion across 2014 on a broad measure, representing some 80 per cent of global GDP and 90 per cent of global financial system assets.
The FSB, an international body that monitors and makes recommendations about the global financial system to the G20, was set up six years ago after the implosion of Lehman Brothers and publishes annual reports into the parallel banking system under its remit to promote internationally transparent financial stability.
Shadow banking involves credit intermediation outside traditional banking, including hedge and investment funds.
The Switzerland-based body, chaired by Mark Carney, governor of the Bank of England, is also tasked with identifying potential weak points in the global financial system.
The FSB said it has devised a monitoring framework to track shadow banking developments to enable the identification of systemic risks, "initiating corrective actions where necessary." The organisation said this year it has added a more narrowly-focused "economic function" overview of shadow banking for its annual monitoring of the non-bank financial sector in order to devise policy responses aimed at risk mitigation.
The FSB, which works in conjunction with national and international financial regulators, estimated that under the new, activity-based, narrow measure of shadow banking, the sector was worth US$36 trillion in 2014, from US$35 trillion in 2013 - equivalent to some 30 per cent of overall non-bank financial sector assets and 60 per cent of the GDP of the 26 participating jurisdictions.
By comparison, the traditional banking sector was last year worth US$135 trillion, 6.4 per cent up on 2013, adjusted for exchange rate effects.
For Carney, "non-bank financing is a welcome additional source of credit to the real economy. The FSB's efforts to transform shadow banking into resilient market-based finance, through enhanced vigilance and mitigating financial stability risks, will help facilitate sustainable economic growth".
But at the same time he stressed the FSB needed to be vigilant in looking to transform shadow banking into a robust source of market finance and at a level of risk which would not destabilise the financial system.
Glenn Stevens, chairman of the FSB Standing Committee on Assessment of Vulnerabilities said: "The annual shadow banking monitoring exercise is an important mechanism for identifying potential financial system vulnerabilities in the non-bank sector. "The activities-based approach in this year's report enhances our understanding of the evolving composition of this sector and potential risks."