Growth in the world’s $70tn (£43tn) shadow banking system is a risk to financial stability and monitoring of the sector is inadequate, the International Monetary Fund has warned.
The Washington-based fund said in its twice-yearly global financial stability report that lending outside the regulated banks was increasing in the post-crisis world, partly because of greater banking regulation.
“The global financial crisis revealed that, absent adequate regulation, shadow banking can put the stability of the financial system at risk in several ways.
“Since the crisis, the ongoing tightening of bank regulations may be encouraging a shift of traditional banking activities into the shadows.”
Britain’s shadow banking sector is more than twice the size of any other economy’s as a share of GDP, according to the IMF.
But despite its large size in the UK, it is in the US that lending outside the regulated banks poses the biggest risk, the fund said. This was partly because the US was the only country where shadow banking assets were greater than those of the conventional banks.
Gaston Gelos, division chief for global financial stability analysis at the IMF, said that while some elements of the shadow banking sector served a useful role, for example as a source of business lending and to improve market liquidity, too little was understood about the scale and nature of its activities.
“We are worried about what we don’t know. We don’t have the data,” he said.
The sector – which includes lending by institutions such as hedge funds, property funds and private equity, as well as through derivatives – grew rapidly in the runup to the financial crisis, and was partly blamed for the freezing of credit markets in 2007.
The IMF said that at the end of 2013, shadow banking accounted for around 30% of systemic risk in the US, the same proportion as its banking sector. It was lower in the UK and eurozone – 7% and 13% respectively – where the banking sector posed a greater systemic risk because of its size.
“The US shadow banking system appears to contribute most to domestic systemic risk; its contribution is much less pronounced in the euro area and the United Kingdom.”
Evidence suggested that shadow banking activities were picking up in the UK, US and eurozone, partly driven by tighter regulation of regular banks, as well as by low interest rates. Securitisations have declined, but less risky shadow banking activities, such as those by investment funds, have expanded rapidly.
“Overall, shadow banking is set to grow further in the current environment of tighter bank regulations and low interest rates. Many indications point to the migration of some activities – such as lending to firms – from traditional banking to the non-bank sector.”
Part of the recent rise in the sector in the UK could be explained by growth in peer-to-peer online lending to households and small businesses, the IMF said.
The IMF said shadow banking growth in emerging markets was also rising, notably in China, where it accounted for an estimated 35-55% of GDP and was expanding at twice the rate of bank credit.
“In emerging market economies, the growth of shadow banking size and activities in China stands out and warrants particular monitoring,” the fund said.
Gelos said international cooperation would be required: “More effort to collect data on activities and entities is important. We propose a macroprudential approach to monitoring.”
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