Banking & Finance

Shadow banking risks shift from US towards China, FSB report says

As off-balance-sheet lending cooled last year in the United States, emerging economies such as China made up the difference in loosely regulated finance

PUBLISHED : Friday, 13 November, 2015, 8:50pm
UPDATED : Friday, 20 November, 2015, 1:28pm

China, along with Ireland and the United States, drove growth in the world’s non-bank finance industry last year, a sector which topped US$80 trillion in assets, a new report from the Financial Stability Board said.

Global shadow banking, or lending not captured on banks’ balance sheets and therefore lightly regulated, grew by US$1.6 trillion in 2014. Much of that growth originated in trusts and money market funds in China, the report said

A narrower measure of shadow banking, which takes most trust funds out of the picture, hit US$36 trillion, a 10.1 per cent increase on the year before, the report showed. Bank lending hit US$135 trillion last year, growing by 6.4 per cent year on year.

The report covered 26 jurisdictions accounting for about 90 per cent of the assets in the global financial system. The FSB, a global oversight body that advises the world’s biggest economies on banking policy, noted the necessity for off-balance-sheet finance in the global economy. But it also warned that shadow banking , when treated like bank finance, has the potential to increase systemic risk, as it did in the build up to the global financial crisis.

The relative size of [that] sector has shrunk significantly in the United States, counterbalanced by a rising share in some [emerging market economies], most notably China
FSB report

One warning signal for from the report was on the funding from what the FSB calls “other financial intermediaries”. Those assets hit 128 per cent of global gross domestic product last year, which is just shy of the level hit before the near-collapse of the global financial system in 2008. However, the pre-crisis buildup in those assets was concentrated in the United States and other developed countries. Last year, the fastest growth in loosely regulated lending had shifted to developing economies, most notably China.

“It is nearing the previous high-point of 130 per cent prior to the financial crisis,” the report said. “In particular, the relative size of [that] sector has shrunk significantly in the United States, counterbalanced by a rising share in some [emerging market economies], most notably China.”

Assets in trust companies, which the report said were mostly based in China, increased by 26 per cent last year. Money market funds grew by 20 per cent, also with the bulk in China.

Since 2012, regulators in China have become increasingly concerned over the growth in shadow banking. Three years ago, wealth management products, which were offered by banks as a higher-yielding alternative to deposits, accounted for much of the that growth.

Since then, China’s banking regulator has attempted to crack down on many forms of shadow lending done at banks. Those efforts have been hailed as a success in pushing the lenders to take assets back onto their balance sheets.

Core shadow banking activity in China – trusts, entrusted loans and bankers’ acceptances – grew slowly in the first half of this year, according to a report this week from Moody’s Investors Service.

In the first half of this year, Moody’s broad count of shadow banking assets hit 44.8 trillion yuan (HK$54.6 trillion), up 9.8 per cent from last year. As a total percentage of banking assets, shadow banking in China rose only 10 basis points to 24.4 per cent, a notable cooling from years past.

The Moody’s report did, however, warn of a sharp increase in the first half of the year in what it called “investment receivables” from smaller banks in China.