Shadow Banking Outperforms its Pre-Crisis Levels

By: EW News Desk Team   Date: 4 November 2011

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EW News Desk Team

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04 November 2011

In a time when the banking and finance industry is fighting to maintain profitability, the shadow banking system has managed to surpass its pre-crisis level, growing bigger than it was before the financial crisis.

A report by the Financial Stability Board has shown 11 largest economies with significant shadow banking found the sector, which previously peaked at $50,000 billion in 2007, dropped to $47,000 billion in 2008 but is now back up to $51,000 billion. When the rest of the eurozone is included the sector is estimated at $60,000 billion. It now constitutes more than a quarter of the entire financial system and is about half the size of traditional banks.

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

Related: The blame game: If the banks didn’t cause the financial crisis, what did?

The FSB, a global banking watchdog, has also outlined plans to clamp down on the poorly-regulated $60 trillion shadow banking system, to reduce the risks it poses to mainstream banks worldwide, adding new regulation next year which would make it harder and more expensive for banks to do business with the shadow banking sector, which includes money market funds, securitisation and securities lending.

While the FSB admitted that shadow banking entities provided extra funding and liquidity, it said the sector poses systemic risks to world financial structures.

Related: Can the Financial Stability Board live up to its name?: Olin Wethington

“With regulation on banks tightened, it is important to address systemic risks...arising from the shadow banking sector and its interaction with the regular banking system,” said Lord Adair Turner, chairman of the FSB’s supervisory and regulatory cooperation committee.

He added that the new rules expected next year would be “fundamental to the stability of the global financial system.”

Related: Chinese businesses turning to shadow banks for loans

Related: Banking’s biggest dilemma – Stability or competition?: Xavier Vives


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