The “shadow banking system” can broadly be described as “credit intermediation involving entities and activities outside the regular banking system”. Although intermediating credit through non-bank channels can have advantages, such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions (e.g. maturity transformation and leverage) and when their interconnectedness with the regular banking system is strong. Therefore, appropriate monitoring and regulatory frameworks for the shadow banking system needs to be in place to mitigate the build-up of risks.
The FSB set out its initial recommendations to enhance the oversight and regulation of the shadow banking system in its report to the G20 in October 2011. Based on the commitment made in the report, the FSB has conducted its second annual monitoring exercise in 2012 using end-2011 data. In the 2012 exercise coverage was broadened to include 25 jurisdictions and the euro area as a whole, compared to 11 jurisdictions and the euro area in the 2011 exercise. The addition of new jurisdictions brings the coverage of the monitoring exercise to 86% of global GDP and 90% of global financial system assets.
The exercise was conducted by the FSB Analytical Group on Vulnerabilities (AGV), the technical working group of the FSB Standing Committee on Assessment of Vulnerabilities (SCAV), using quantitative and qualitative information, and followed a similar methodology as that used for the 2011 exercise. Its primary focus is on a “macro-mapping” based on national Flow of Funds and Sector Balance Sheet data (hereafter Flow of Funds), that looks at all non-bank financial intermediation to ensure that data gathering and surveillance cover the areas where shadow banking-related risks to the financial system might potentially arise.
The main findings from the 2012 exercise are as follows:
• According to the “macro-mapping” measure, the global shadow banking system, as conservatively proxied by “Other Financial Intermediaries” grew rapidly before the crisis, rising from $26 trillion in 2002 to $62 trillion in 2007. The size of the total system declined slightly in 2008 but increased subsequently to reach $67 trillion in 2011 (equivalent to 111% of the aggregated GDP of all jurisdictions). Compared to last year’s estimate, expanding the coverage of the monitoring exercise has increased the global estimate for the size of the shadow banking system by some $5 to $6 trillion.
• The shadow banking system’s share of total financial intermediation has decreased since the onset of the crisis and has remained at around 25% in 2009-2011, after having peaked at 27% in 2007. In broad terms, the aggregate size of the shadow banking system is around half the size of banking system assets.• The US has the largest shadow banking system, with assets of $23 trillion in 2011, followed by the euro area ($22 trillion) and the UK ($9 trillion). However, the US’ share of the global shadow banking system has declined from 44% in 2005 to 35% in 2011. This decline has been mirrored mostly by an increase in the shares of the UK and the euro area.
• There is a considerable divergence among jurisdictions in terms of: (i) the share of non-bank financial intermediaries (NBFIs) in the overall financial system; (ii) relative size of the shadow banking system to GDP; (iii) the activities undertaken by the NBFIs; and (iv) recent growth trends.
• The Netherlands (45%) and the US (35%) are the two jurisdictions where NBFIs are the largest sector relative to other financial institutions in their systems. The share of NBFIs is also relatively large in Hong Kong (around 35%), the euro area (30%), Switzerland, the UK, Singapore, and Korea (all around 25%).
• Jurisdictions where NBFIs are the largest relative to GDP are Hong Kong (520%), the Netherlands (490%), the UK (370%), Singapore (260%) and Switzerland (210%). Part of this concentration can be explained by the fact that these jurisdictions are significant international financial centres that host activities of foreign-owned institutions.
• After the crisis (2008-2011), the shadow banking system continued to grow although at a slower pace in seventeen jurisdictions (half of them being emerging markets and developing economies undergoing financial deepening) and contracted in the remaining eight jurisdictions.
• National authorities have also performed more detailed analyses of their NBFIs in the form of case studies, examples of which are presented in Annex 5. Although further data and more in-depth analysis may be needed, these studies illustrate the application of risk factor analysis (e.g. maturity/liquidity transformation, leverage, regulatory arbitrage) to narrow down to a subset of entities and activities that might pose systemic risk.
• Among the jurisdictions where data is available, interconnectedness risk tends to be higher for shadow banking entities than for banks. Although further analysis may be needed with more cross-border and prudential information, shadow banking entities seem to be more dependent on bank funding and are more heavily invested in bank assets, than vice versa.
• Regarding finance companies, which are a focus area for this year’s report, the survey responses from 25 participating jurisdictions suggest the existence of a wide range of business models covered under the same label. The responses also underlined the important role finance companies play in providing credit to the real economy, especially by filling credit voids that are not covered by other financialinstitutions. A few jurisdictions have also emphasised the need to enhance monitoring of the sector as finance companies may be liable to specific risk factors and/or regulatory arbitrage. However, since the size of the sector is limited, participating jurisdictions do not see significant systemic risks arising from this sector at present.
Going forward, the monitoring exercise should benefit from continuous improvement and thorough follow-up by jurisdictions of identified gaps and data inconsistencies. It is also important that the monitoring framework remains sufficiently flexible, forward-looking and adaptable to capture innovations and mutations that could lead to growing systemic risks and arbitrage.
Further improvements in data availability and granularity will be essential for the monitoring exercise to be able to adequately capture the magnitude and nature of risks in the shadow banking system. This is especially relevant for those jurisdictions that lack fully developed Flow of Fund statistics (e.g. China, Russia, Saudi Arabia) or have low granularity at the sector level resulting in a relatively large share of unidentified NBFIs (e.g. UK, euro area-wide Flow of Funds). Data enhancing efforts may leverage off on-going initiatives to improve Flow of Funds statistics (e.g. the IMF/FSB Data Gaps initiatives) or on supervisory information and market intelligence as a complement to Flow of Funds data. Survey data or market estimates can also be used more extensively for those parts of the shadow banking system (e.g. hedge funds) for which Flow of funds do not provide a reliable estimate.
The use of additional analytical methods based on market, supervisory and other data to conduct deeper assessment of risks, for example, maturity transformation, leverage and interconnectedness (see as an illustration Annex 4) would also provide significant value added to the report.
Lastly, the mostly entity-based focus of the “macro-mapping” should be complemented next year by obtaining more granular data on assets/liabilities (e.g. repos, deposits) or expanding activity-based monitoring, to cover developments in relevant markets where shadow banking activity may occur, such as repo markets, securities lending and securitisation. In addition to existing supervisory and market information, the implementation of some of the shadow banking regulatory recommendations, such as the transparency recommendations from the FSB Workstream on securities lending and repos (WS5), is expected to provide the necessary data for such an enriched monitoring.
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