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World's 'shadow banks' continue to expand

[LONDON ] Growth in global bond, real estate and money market funds continued to swell the world's "shadow banking" sector, a watchdog that coordinates financial regulation for the G20 big economies said on Monday.

The Financial Stability Board said its "narrow" measure of shadow banking activities that could pose a threat to stability, rose 7.6 per cent to US$45.2 trillion in 2016, the latest year for which figures have been collated.

It represents 13 per cent of total financial system assets in the 29 jurisdictions surveyed. Data from China and Luxembourg were included in the measure for the first time.

"Non-bank financing provides a valuable alternative to bank financing and helps support real economic activity," the FSB said in its report. Nevertheless, increased reliance on non-bank funding could give rise to new risks, it said.

The so-called shadow banking sector, made up of companies other than banks that provide financial services, has been treated with suspicion by some regulators since the financial crisis a decade ago.

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Still, it has some champions among policymakers who say it helps keep capital markets more liquid. The European Union actively courts participants to diversify away from heavy reliance on bank loans for EU companies.

Apart from debt investment funds, the measure of shadow banking also includes the repurchase and debt securitisation markets as well as hedge funds involved in credit.

Faced with few rules in the past, sub-sectors like securitisation are now regulated and seen to pose less risk to stability.

Open-ended bond funds, hedge funds that offer credit and money market funds account for 72 per cent of the narrow measure, and grew by 11 per cent in 2016.

Regulators have asked funds to have safeguards in place for extreme market turbulence to avoid instability from fire sales of assets if many investors ask for their money back.

The United States accounts for 31 per cent of the narrow measure, followed by China with 16 per cent, the Cayman Islands at 10 per cent and Japan at 6 per cent.

A broader measure, which includes all financial firms that are not central banks, banks, pension funds or insurers, rose 8 per cent toUS $99 trillion to represent 30 per cent of global financial assets, its highest level since at least 2002, the FSB said.


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