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Unregulated banking transactions now worth $80 trillion, says FSB

The unregulated 'shadow banking' sector grew by US$1.6 trillion last year to be worth $80 trillion internationally, the Financial Stability Board (FSB) has said.16 Nov 2015

In a report issued ahead of the G20 summit due to be held in Turkey next week, the FSB said it had measured shadow banking in 26 jurisdictions and across the euro area. The review covered 80% of global GDP and 90% of global financial system assets, it said.

The term shadow banking is used for banking activity undertaken by non-bank and non-insurance financial intermediaries.

The FSB provided two measures of the sector, one broad and one narrower. The $80 trillion international figure is taken from the broad measure, which the FSB used in its previous years' reports. This looks at all assets of 'other financial intermediaries'. The narrow measure is based on a new methodology looking at an 'economic function' overview of the sector.

"The approach helps narrow the focus to those parts of the non-bank financial sector where shadow banking risks may arise and may need appropriate policy responses to mitigate these risks," the FSB said.

Under that narrower measure the sector is worth $36 trillion, equivalent to 59% of the GDP of the jurisdictions covered, and 12% of their financial system assets, the FSB said. The value has grown moderately "over the past several years", it said. 

More than 80% of global shadow banking assets are located in a subset of advanced economies in North America, Asia and northern Europe, the report said.

Oversight and regulation of shadow banking has been strengthened this year, particularly in the area of securities financing, and the implementation of previously agreed policies is progressing, the FSB said.

Mark Carney, chair of the FSB, said: "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."

Glenn Stevens, chair of the FSB's standing committee on assessment of vulnerabilities. said that the annual monitoring exercise was "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".

Earlier this month the European Central Bank said that 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.

"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.