China powers growth in global shadow banking

Fears rise over mainstream players' potential to shift risky activities to less regulated sector

PUBLISHED : Monday, 18 November, 2013, 5:25am
UPDATED : Monday, 18 November, 2013, 5:25am

The world's shadow banking sector grew US$5 trillion last year to US$71 trillion, helped by a 42 per cent expansion in China, according to the latest annual figures from the Financial Stability Board.

Shadow banking covers more lightly regulated areas of finance that includes bank-like activities such as borrowing and lending that take place outside banks. These include the repurchase agreement market, securities lending, real estate, hedge funds, money market funds and securitisation.

Shadow banking became a pejorative term because of its role in the 2007-09 global financial crisis. But the tone has changed because of the need for alternative sources of money to fund economic growth while banks focus on repairing balance sheets.

But policymakers are also worried that as mainstream banks become more regulated in the wake of the crisis, some of their more risky activities could shift to the shadow banking sector.

The third annual set of data from the FSB, the regulatory task force for the Group of 20 economies, provides a statistical underpinning to new global rules for shadow banks that are now being finalised.

The United States accounts for US$26 trillion or 37 per cent of the US$71 trillion total, followed by the euro zone at US$22 trillion, Britain at US$9 trillion and Japan at US$4 trillion.

The sector grew more than 20 per cent in four emerging markets - China, Argentina, India and South Africa - partly a sign of how their financial systems were deepening from a small base, the FSB said.

China still only accounts for 3 per cent of shadow banking despite being the world's second-biggest economy.

The stability board noted an increase in non-bank sources of financing to small companies in particular, a development where potential risks needed closer monitoring.

"Our aim is for shadow banking to deliver transparent and resilient market-based financing, thus diversifying the sources of financing of our economies in a sustainable way," FSB chairman and Bank of England governor Mark Carney said.

"The FSB will continue to improve its global monitoring exercise to identify the financial stability risks posed by shadow banking as the result of its use of leverage, maturity and liquidity transformation."

Shadow banks account for a quarter of the world's total financial assets and equivalent to half of banking assets. But a lack of data on risks to financial systems from links with foreign shadow banking systems created a potentially large gap, the board said.