The Financial Stability Board (FSB) has released its fourth annual Global Shadow Banking Monitoring report, revealing that the shadow bank activities increased by $5 trillion from 2012 to 2013, reaching $75 trillion. That means that shadow banking assets, at least by one measure, make up a quarter of total financial assets, half of banking assets, and are equal to 120% of global GDP.
EM playing catch-up on shadow banking
Since shadow banking activities are more or less unregulated, so the FSB numbers are necessarily estimates. The organization starts with a broad measure called the Monitoring Universe of Non-Bank Financial Intermediation (MUNFI), which is the headline $75 trillion figure. That covers 25 separate jurisdictions, including the Eurozone, and about 90% of global financial assets, so while it’s not literally worldwide it covers all the places that you’re likely to be invested.
“Adjusted for exchange rate effects, MUNFI assets grew by +7% in 2013, driven in part by a general increase in valuation of global financial markets,” says the report, but the range in growth is enormous, from -6% in Spain to +50% in Argentina.
Shadow bank assets grew faster in emerging markets by percent because they are starting from a smaller base, the same catch-up effect that makes it possible for an emerging economy to hit double digit GDP growth rates. The FSB reports that China in particular has seen a big increase in the amount of shadow banking activity.
Defining down shadow banking
“[MUNFI] provides a conservative proxy of the global shadow banking system, which can be further narrowed down,” says the FSB report.
The FSB’s strict definition of shadow banking is an institution that plays a direct role in credit intermediation (as opposed to financial intermediation), isn’t consolidated into a bank as part of existing prudential regulations, and “exhibit risks associated with shadow banking including but not limited to maturity and liquidity transformation, and/or leverage.”
As any grade school vocabulary book will tell you, defining something in terms of itself is a no-no, so the third point is a bit problematic, but all three have the potential effect of making the shadow banking system appear smaller than it is when the real point of the exercise is to understand how much risk/leverage is going unregulated in the financial sector.
One example is self-securitization, a practice that ZeroHedge has dubbed the ‘unspoken, festering secret at the heart of shadow banking’. Self-securitization is when a bank securitizes its own assets, holds onto them, and uses them as collateral to get funding from central banks, and it mostly goes on in six countries: Australia, Canada, Italy, the Netherlands, Spain, and the UK. Another example is the exclusion of equity REITs, which usually own and operate properties, while continuing to include mortgage REITs, which invest in mortgages and other debt instruments.
The various refinements knock the FSB estimate of the shadow banking sector from the headline MUNFI numbers all the way down to $35 trillion, with a 2.4% annual growth rate as opposed to 6.6%.
The full report can be found here shadow-banking