FSB: Shadow Banking Assets Top $80 Trillion

Nov 13 2015 | 8:43pm ET

The global value of assets in the so-called shadow banking rose to $1.6 trillion to $80 trillion last year, according to a new report by the Financial Stability Board (FSB).

Issued ahead of upcoming G20 summit in Turkey, the report notes that transactions not subject to regulatory oversight but that may pose financial stability risks grew to an estimated $36 trillion – equivalent to 59% of GDP of participating jurisdictions, and 12% of financial system assets – last year. 

Shadow banking is broadly defined as lending activity by non-banks within the financial system. Since the financial crisis, alternative asset managers such as hedge funds have become increasingly interested in the sector, and a large number of funds have raised capital to pursue direct lending, asset-backed structured loans and cash-flow-based lending facilities. This activity has filled the gap left by traditional financial institutions beset with tighter regulation and stricter capital controls, while investors, faced with few ways to generate above-market fixed income returns, have clamored for access to these types of transactions, which typically carry higher yield.

Accordingly, the growth in fund assets dedicated to this sector has been significant. From $23 billion raised annually for private debt pre-crisis, funds accumulated $75 billion in 2014 and have amassed $73 billion so far this year, according to data provider Preqin. 

While the report agrees that “intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy,” it quickly points out that “Such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions and when their interconnectedness with the regular banking system is strong.”

The FSB’s job is to monitor the shadow-banking sector, identify where risks exist, and help to mitigate them when possible. As with many regulatory discussions of this topic, however, it does not delve into how the disintermediation of banks (especially in the middle market) has come about in the first place. Ironically, credit formation within the traditional banking sector was certainly not immune to the development of systemic risks leading up to the financial crisis. 

Based in Switzerland, the FSB is chaired by Bank of England governor Mark Carney and tasked with identifying potential weak points in the global financial system. It was formed six years ago in the aftermath of the Lehman Brothers implosion, and works in conjunction with national and international financial regulators to understand systemic and macro risks to the global financial system.

The full report is available here.

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