Shadow bank growth outpaces traditional sector: FSB

The strong growth in the sector was largely driven by market gains, which boosted asset valuations, alongside investor inflows.

Indeed, within the non-bank sector, the assets of investment funds, hedge funds, money market funds and other intermediaries grew by almost 9.4% year over year to approximately US$160 trillion, the FSB said.

The FSB’s narrow measure of the non-bank sector, which includes funds and firms that are engaged in activities that the regulators have determined may pose bank-like risks to financial stability, also grew by 9.8% during the year to US$70.2 trillion — which marks the highest level ever recorded by the FSB.

However, most of the metrics used to assess the vulnerability of non-banks, such as liquidity and leverage indicators, remained stable year over year, it noted.

“Metrics for liquidity transformation in fixed income and mixed funds, as well as for leverage in finance companies, broker-dealers and [structured finance vehicles] were relatively high,” it said.

The FSB’s annual monitoring exercise was launched in the wake of the global financial crisis, which revealed weaknesses in regulatory oversight of a major segment of the global financial system, often referred to as the shadow banking sector. The goal of the exercise is to identify, and if necessary, address the build-up of risks within the sector.

The group reported that all segments of the shadow banking sector doubled their average growth rates  over the previous five years. Broker-dealers led the way with 16.2% growth, more than triple its five-year average.

Insurance and pension fund assets grew strongly too, up 6.8% and 6.7% respectively, it noted.

The exercise also captured non-bank fintech lending for the first time, which amounted to about US$42 billion, the FSB reported.

And, it noted that despite higher interest rates, borrowing by financial institutions continued to grow during the year, with the shadow sector outpacing the trading bank sector. Borrowing rose 4.1% among the shadow sector, compared to 3.4% for banks.

In particular, REITs, finance companies, broker-dealers and structured finance vehicles had the highest levels of financial leverage, it said.