The value of unregulated “shadow banking” rose to some $80 trillion (74 trillion euros) last year, according to a report Thursday by the Financial Stability Board (FSB), which advises G20 states on banking reform and oversees regulation of the global financial system.
The report, issued ahead of the upcoming G20s summit in Antalya, said shadow banking transactions not subject to regulatory oversight grew by $2 trillion across 2014 on a broad measure covering 26 jurisdictions and the euro area as a whole, representing some 80 percent of global GDP and 90 percent of global financial system assets.
The FSB, which advises G20 countries on banking reform and was set up six years ago after the implosion of Lehman Brothers, publishes annual reports into the parallel banking system under its remit to promote internationally transparent financial stability.
Shadow banking involves transactions outside traditional banking, including hedge and investment funds.
The Switzerland-based body, chaired by Mark Carney, governor of the Bank of England, is also tasked with identifying potential weak points in the global financial system.
The FSB said it has devised a monitoring framework to track shadow banking developments to enable the identification of systemic risks, “initiating corrective actions where necessary.”
The organization said this year it has added a more narrowly-focused “economic function” overview of shadow banking for its annual monitoring of the non-bank financial sector in order to devise policy responses aimed at risk mitigation.
The FSB, which works in conjunction with national and international financial regulators, estimated that under the new, activity-based, narrow measure of shadow banking, the sector was worth $36 trillion in 2014, from $35 trillion in 2013 — equivalent to some 30 percent of overall non-bank financial sector assets and 60 percent of the GDP of the 26 participating jurisdictions
– ‘Facilitate growth’ –
By comparison, the traditional banking sector was last year worth $135 trillion, 6.4 percent up on 2013.
For Carney, “non-bank financing is a welcome additional source of credit to the real economy. The FSB’s efforts to transform shadow banking into resilient market-based finance, through enhanced vigilance and mitigating financial stability risks, will help facilitate sustainable economic growth”.
But at the same time he stressed the FSB needed to be vigilant in looking to transform shadow banking into a robust source of market finance and at a level of risk which would not destabilize the financial system.
Glenn Stevens, chairman of the FSB Standing Committee on Assessment of Vulnerabilities said: “The annual shadow banking monitoring exercise is an important mechanism for identifying potential financial system vulnerabilities in the non-bank sector.
“The activities-based approach in this year’s report enhances our understanding of the evolving composition of this sector and potential risks.”