The so-called ‘shadow banking’ industry is now worth around US$67 trillion, a figure some US$6 trillion more than previously estimated, according to a report by the Financial Stability Board (FSB).
The Brussels-based FSB, a task force representing the top 20 global economies, said that regulation of the sector – comprising non-bank institutions including hedge funds, private equity firms and other investment companies – was currently lax. “The FSB is of the view that the authorities’ approach to shadow banking has to be a targeted one,” it commented. “The objective is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability.”
The size of the system “can create systemic risks” and “amplify market reactions when market liquidity is scarce,” the FSB added. The EU’s Alternative Investment Fund Managers Directive (AIFMD) regulation is one such example of increased regulation of the sector.
The FSB also commented that tighter regulation requiring banks to bolster their capital reserves to cover potential losses could result in an unintended further impetus for shadow banking.
The report finds that the US had the largest shadow banking system in 2011, estimated at around US$23 trillion in 2011, closely followed by the eurozone with US$22 trillion, while the UK accounted for US$9 trillion. However, the US share has declined over recent years while that of both the eurozone and the UK has increased. It also found that in the five years to 2007, shadow banking had more than doubled to US$62 trillion.
Responding to the FSB’s findings, Dr Pete Hahn of Cass Business School said: “The menacing name ‘shadow banking’ should be replaced with the less ominous but more explicit term ‘non-bank creditors’. Non-bank creditors that smell, feel, and sound like banks but aren’t in name are clearly the problem; while non-bank creditors that do not, and are not linked to the banking system, surely offer us a welcome reduced dependence on banks.”
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