Shadow Banking

Acting bank-like, but not being regulated like banks, shadow banking is huge and (still) growing.

Why should we be concerned?

Shadow banking can be thought of as bank-like activities that are not regulated and supervised in the same way that banks are. These activities pose a clear danger to stability. The metaphor of the shadow is apt – we can’t quite see what is going on, how much there is, and what dangers are lurking. Many of the unexpected losses of the 2008 crisis came from activities that banks and others had been hiding in the shadows. Through slight changes of form or jurisdiction, shadow banking activities escape the letter of the law, and they are subject to lighter regulation and supervision. They slip into the shadows until they come back to bite us when things go wrong.

The indicator…

The Financial Stability Board’s (FSB) Global shadow banking monitoring report attempts to measure the size and growth of shadow banking activities, noting their changing characteristics. The report’s narrow measure puts shadow banking assets at $45.2 trillion in 2016, up 7.6% from 2015. The wider measure of non-bank financial intermediation (MUNFI in the diagram below) stands at a staggering $160 trillion, also growing fast.

Finance Watch Shadow Banking

MUNFI = Monitoring Universe of Non-bank Financial Intermediation, includes OFIs, pension funds, insurance corporations and financial auxiliaries, OFIs also includes captive financial institutions and money lenders.

Sources : National sector balance sheet and other data, FSB calculations

What should we change?

As the Change Finance campaign demands: There should be No Loopholes, in other words that “Simple, effective regulation should cover all financial activities, including transactions ‘over the counter’ or ‘in the shadows.’”

Closing the loopholes doesn’t just mean a new set of rules for financial firms to get around, it means changing the burden of proof so that activities are covered by default. Financial firms should have to do things in certain ways and in certain places, unless they can prove they have a good reason for doing otherwise. Much like how it is for medicine makers, new activities and instruments should not be allowed by default, they should be approved by regulators before financial firms are allowed to use them.

You can find more detailed policy ideas elsewhere on the Finance Watch website and on the Change Finance website.

1. The narrow measure is based on data from the 29 jurisdictions, instead of 21 jurisdictions and the euro area, because the data from eight participating euro area jurisdictions are more granular than the aggregate euro area from the European Central Bank (ECB). For 29 jurisdictions, the corresponding aggregates are Total Global Financial Assets ($336 trillion), MUNFI ($160 trillion) and OFIs ($99 trillion).

2. For additional details on these categories, please see Section 4

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