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Regulators must understand impact of shadow banking sector, says ECB

The "shadow banking" sector is an increasingly important provider of funding within the euro area economy and regulators will have to adapt their approach to deal with it, the European Central Bank said in its report on financial structures (RFS) in the region. 02 Nov 2015

Shadow banking, namely banking activity undertaken by non-bank and non-insurance financial intermediaries, has grown substantially in the past decade, the ECB said

"Over the past few years, growth in total euro area financial assets has been driven primarily by non-bank financial entities, while total banking assets have rebounded to levels last observed in 2008. Of the approximately €60 trillion of total financial system assets in the euro area, more than $23 trillion are now held by shadow banking entities," the ECB said.

Shadow banking entities have increased their share of total assets in the financial sector from 33% to 38% since 2009, the RFS said, while the share held by credit institutions has fallen from 55% to 48%.

In order to get a picture of the wider financial sector, analyses of the structure of individual parts of the financial system "will need to be complemented with an analysis of the interconnectedness of these different financial sector components in order to obtain a full picture of possible structural risks to financial stability in the euro area," the ECB said.

In June, the Council of the European Union and the European Parliament agreed a draft regulation to improve transparency in securities lending and repurchase transactions, which are often carried out by the shadow banking sector.

Last year the International Monetary Fund (IMF) urged regulators to improve their oversight of the shadow banking sector, saying that it is "both a boon and a bane for countries".

The RFS looks at insurance corporations and pension funds (ICPFs) and shadow banking as well as the more general banking structure, and the interconnectedness between all of these sectors, the ECB said.

Banks and other financial intermediates remain the largest holders of loans, the report said.

The banking sector in the euro banking area is consolidating, resulting in an "overall improvement of efficiency in the system", the ECB said. The total number of credit institutions decreased to 5,614 in 2014, from 6,774 in 2008. Total assets of the sector stood at €28.1 trillion at the end of 2014, a decline of 15.7% from 2008, the RFS said.