Tue, Nov 20, 2012 - Page 15 News List

Shadow banking worth US$67 trillion

THRIVING:A report from a G20 task force found the system had more than doubled in the five years up to the crisis for which it is blamed, and has grown US$5 trillion since


The shadows of shoppers are pictured in St Helier, Jersey, the British offshore tax haven, on Nov. 13.

Photo: Reuters

The system of so-called “shadow banking,” blamed by some for aggravating the global financial crisis, grew to a new high of US$67 trillion globally last year, a top regulatory group said, calling for tighter control of the sector.

A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policymakers that shadow banking is continuing to thrive, beyond the reach of a regulatory net tightening around traditional banks and banking activities.

The FSB, a task force from the world’s top 20 economies, also called for greater regulatory control of shadow banking.

“The FSB is of the view that the authorities’ approach to shadow banking has to be a targeted one,” the group wrote in a report, citing the current lax regulation of the sector.

“The objective is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability,” it said.

Officials at the European Commission in Brussels also see closer oversight of the sector as important in preventing a repeat of the financial crisis that has toppled banks over the past five years and rocked the eurozone.

The study by the FSB said shadow banking around the world more than doubled to US$62 trillion in the five years to 2007, before the crisis struck.

However, the size of the total system had grown to US$67 trillion last year — more than the total economic output of all the countries in the study.

The multitrillion-dollar activities of hedge funds and private equity companies are often cited as examples of shadow banking.

However, the term also covers investment funds, money market funds and even cash-rich firms that lend government bonds to banks, which in turn use them as security when taking credit from the European Central Bank.

Even the man credited with coining the term, US economist and former Pacific Investment Management Co managing director Paul McCulley, gave a catch-all definition, saying he understood shadow banking to mean “the whole alphabet soup of levered-up non-bank investment conduits, vehicles and structures,” such as the special investment vehicles that many blamed for the financial crisis.

The US had the largest shadow banking system, the FSB said, with assets of US$23 trillion last year, followed by the eurozone — with US$22 trillion — and the UK — at US$9 trillion.

The US share of the global shadow banking system has declined in recent years, the FSB said, while the shares of the UK and the eurozone of the system have increased.

The FSB warned that tighter rules that force banks to hoard more capital reserves to cover losses could bolster shadow banking.

It advocated better controls, although it cautioned that shadow banking reforms should be dealt with carefully because the sector can also be a source of credit for business and consumers.

Forms of shadow banking can include securitization, which can transform bank loans into a tradeable instrument that can then be used to refinance credit, making it easier to lend.

The European Commission is expected to propose EU-wide rules for shadow banking next year.

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