The G20’s Financial Stability Board suggests that “shadow banking” is best defined as credit intermediation with entities and activities outside of the regular banking system. It is important to note that intermediating credit through non-bank channels has significant practical advantages and has become an important part of the financing of the real economy.

That said, as a November 12th report from the FSB notes, such non-official banking channels also easily “become a source of systemic risk, especially when they are structured to perform bank-like functions (e.g. maturity and liquidity transformation, and leverage) and when their interconnectedness with the regular banking system is strong.”

The report goes on to note that, therefore, “appropriate monitoring of shadow banking and the application of appropriate policy responses, where necessary, helps to mitigate the build-up of such systemic risks.”

The new FSB report discusses the results of the fifth annual shadow banking monitoring exercise using data as of end-2014 for 26 jurisdictions (including Ireland for the first time) and the euro area as a whole. The areas included in the study represent close to 80% of global GDP and 90% of global financial assets.

The 2015 FSB shadow banking report introduces an effort to narrow the focus to those parts of non-bank credit intermediation where more significant shadow banking risks such as maturity transformation, liquidity transformation or leverage are likely to be found. Related to this, a new activity-based “economic function” measure of shadow is introduced in this year’s report (based on the policy framework published by the FSB in August of 2013 and noted in an annex of the 2014 Global Shadow Banking Monitoring Report).

2014 shadow banking statistics based on FSB’s new narrow measure

[drizzle]Global Shadow Banking

Using the FSB’s new methodology for assessing non-bank financial entities and activities by “economic functions”, the so-called narrow measure of global shadow banking that could represent financial stability risks came to a total of $36 trillion in 2014 in the 26 participating jurisdictions. Of note, this represents 59% of the GDP of the participating jurisdictions, and 12% of financial system assets.

When you take a look at the historical trend for this figure, you can see that the total amount of shadow banking that might represent financial risks has grown steadily over the last few years.

Global Shadow Banking

Also of interest, over 80% of global shadow banking assets are found in advanced economies in North America, Asia and Europe.

Moreover, the new classification by economic functions shows that credit intermediation associated with money market funds, hedge funds and other investment funds represents 60% of the narrow measure of shadow banking. This segment has increased by over 10% on average over the last four years. That said, the amount of securitization-based credit intermediation (a big part of the problem in the financial crisis) has dropped appreciably over the same period.

2014 shadow banking statistics based on FSB’s traditional broad measure

Global Shadow Banking

The FSB report noted that the broad, aggregate measure of the assets of other financial intermediaries, pension funds and insurance companies grew by 9% to $137 trillion over the past year, which means shadow banking represents close to 40% of total financial system assets in 20 jurisdictions and the euro area. Of note, the insurance company, pension fund and OFI sectors all enjoyed solid asset growth in 2014, but banking system assets dropped a bit (in U.S. dollar terms).

Global Shadow Banking

Taking a look at assets of OFIs alone (i.e. excluding pension funds and insurance companies), non-bank financial intermediation of the 20 jurisdictions and the euro area rose $1.6 trillion to $80 trillion in 2014. The increase can be attributed to both higher equity valuations and a major increase in non-bank credit intermediation, mainly from capital markets.

See full report below.

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