FSB publishes Global Shadow Banking Monitoring Report 2017

Mar 07 2018

The Financial Stability Board (FSB) has published the monitoring report on shadow banking for 2017. The FSB provides a broad definition of “shadow banking” as “credit intermediation involving entities outside the regular banking system”. This intermediation, when appropriately managed, provides a reliable funding option for real economic activity. Latest financial crisis proved however that entities outside banks regulators jurisdiction are allowed to operate on a large scale, extending long term credit by means of short-term leveraged funding. This “maturity-transform” of credit might as well involve multiple transaction, yielding a chain which may unsettle financial stability.

In response to a G20 request at the Seoul Summit in 2010, the FSB adopted a two-way strategy to address potential concerns out of the shadow banking activity, and .  First, the FSB has created a system-wide monitoring framework to track developments in the shadow banking system, identifying the build-up of systemic risks and initiating corrective actions where necessary. Second, the FSB has been coordinating and contributing to the development of policies where oversight and regulation must be reinforced to mitigate the potential systemic risks associated with shadow banking.

The global monitoring of developments in the shadow banking system is part of the FSB’s strategy to transform shadow banking into resilient market-based finance. The 2017 monitoring exercise covers data up to end-2016 from 29 jurisdictions, which together represent over 80% of global GDP, including (for the first time) Luxembourg.

The exercise is activity-based rather than entity-based: the FSB focuses on those activities which are part of the non-bank financial sector and perform economic functions which might hamper financial stability.  As in previous monitoring exercises, the report compares the size and trends of financial sectors across jurisdictions based primarily on sector balance sheet data.

It then narrows the focus to those parts of non-bank credit intermediation that may pose financial stability risks (hereafter the “narrow measure of shadow banking” or “narrow measure”), based on the FSB’s methodology.

The FSB collects the main findings from the 2017 monitoring exercise as follows:

  • The activity-based, narrow measure of shadow banking grew by 7.6% in 2016 to $45.2 trillion for the 29 jurisdictions. This represents 13% of total financial system assets of these jurisdictions. China contributed $7.0 trillion to the narrow measure (15.5%), and Luxembourg $3.2 trillion (7.2%).
  • Collective investment vehicles with features that make them susceptible to runs (eg open-ended fixed income funds, credit hedge funds and money market funds), which represent 72% of the narrow measure, grew by 11% in 2016. The considerable trend growth of these collective investment vehicles – 13% on average over the past five years – has been accompanied by a relatively high degree of investment in credit products and some liquidity and maturity transformation. This highlights the importance of implementing the FSB policy recommendations on structural vulnerabilities from asset management activities published in January 2017.
  • The assets of market intermediaries that depend on short-term funding or secured funding of client assets (eg broker-dealers) declined by 3%. These intermediaries accounted for 8% of the narrow measure by end-2016. Reflecting their business models, broker-dealers in some jurisdictions employ significant leverage, although it is lower than the levels prior to the 2007-09 global financial crisis.
  • The assets of non-bank financial entities engaged in loan provision that is dependent on short-term funding, such as finance companies, shrank by almost 4% in 2016, to 6% of the narrow measure. In some jurisdictions, finance companies tend to have relatively high leverage and maturity transformation, which increases their susceptibility to roll-over risk during period of market stress.
  • In 2016, the wider “Other Financial Intermediaries” (OFIs) aggregate, which includes all financial institutions that are not central banks, banks, insurance corporations, pension funds, public financial institutions or financial auxiliaries, grew by 8% to $99 trillion in 21 jurisdictions and the euro area, faster than banks, insurance corporations and pension funds. OFI assets now represent 30% of total financial assets, the highest level since at least 2002.


(source: Financial Stability Board, www.fsb.org)

Link to publication (PDF)


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