Shadow banking sector hits new peak

Written by The Financial Times | Updated: Oct 29 2011, 08:04am hrs
By Brooke Masters in London

The shadow banking system, the host of lightly regulated entities that compete with banks to provide credit, is bigger than it was before the financial crisis, despite growing efforts by regulators to rein it in.

A study by the Financial Stability Board of the 11 largest economies with significant shadow banking found

the sector, which previously peaked at $50,000bn in 2007, dropped to $47,000bn in 2008 but is now back up to $51,000bn. When the rest of the eurozone is included the sector is estimated at $60,000bn. It now constitutes more than a quarter of the financial system and is about half the size of traditional banks.

The rapid growth of non-bank credit in the years 2002 to 2007 has been seen as a source of the 2008 crisis because it fostered a rapid rise in debt and high asset price inflation. Regulators fear it remains a big threat to long-term stability, particularly as more activities move out of the banking sector to escape tighter regulation there.

The study is part of a worldwide effort to monitor shadow banking so that regulators will be able to rein it in. The FSB announced it would monitor the sector annually. It said it and other global regulators would also publish studies and recommendations over the next 18 months that addressed parts of the sector, including money market funds, securitisation, securities lending and short-term secured lending known as repo, as well as other shadow banking entities. They are also looking at how banks interact with their shadow counterparts.

The US has the largest shadow banking sector at $24,000bn, according to the FSB, but its overall share of the global shadow banking sector has declined since 2007 from 54 to 46 per cent. Money market funds, the most visible part of the sector, have declined from $4,800bn to $3,900bn.

Other kinds of investment funds that extend credit are now the single largest part of the shadow banking sector, with 29 per cent of the assets. Structured finance vehicles come second with 9 per cent.

The Financial Times Limited 2011