The International Monetary Fund urged regulators to pay closer attention to a shadow banking system that has grown to as much as $60 trillion worldwide to help prevent risks from building outside the bounds of traditional financial oversight.
“Shadow banking tends to take off when strict banking regulations are in place, which leads to circumvention of regulations,” Gaston Gelos, chief of the IMF’s global financial analysis division, said in a statement accompanying portions released today of its Global Financial Stability Report.
The full report is scheduled to be released Oct. 8. He said non-traditional lending also grows when real interest rates and yield spreads are low and investors are searching for higher returns, and when there is a large institutional demand for safe assets such as insurance companies and pension funds, he said.
Shadow banks include money-market mutual funds, hedge funds, finance companies and broker-dealers. They pose a risk to the broader financial system because they rely on short-term funding, “which can lead to forced asset sales and downward price spirals when investors want their money back at short notice.”
The IMF estimated the shadow banking industry at $15 trillion to $25 trillion in the US; $13.5 trillion to $22.5 trillion in the euro area; $2.5 trillion to $6 trillion in Japan; and about $7 trillion in emerging markets.
“Shadow banking can play a beneficial role as a complement to traditional banking by expanding access to credit or by supporting market liquidity, maturity transformation and risk sharing,” the IMF said in the report.
“It often, however, comes with bank-like risks, as seen during the 2007-08 global financial crisis.”
The report urges policy makers to address shadow banks with “a more encompassing approach to regulation and supervision that focuses both on activities and on entities and places greater emphasis on systemic risk.”
Bloomberg
