The $75 trillion shadow hanging over the world

Global shadow banking assets rose to a record $75 trillion (£46.5 trillion) last year, new analysis shows.

The value of risky investment products, mortgage-backed securities and other non-bank entities increased by $5 trillion to $75 trillion in 2013, according to the Financial Stability Board (FSB).

Shadow banking, which is not constrained by bank regulation, now represents about 25pc of total financial assets – or roughly half of the global banking system. It is also equivalent to 120pc of global gross domestic product (GDP).

The FSB, which monitors and makes recommendations on financial stability issues, said that while non-bank lending complemented traditional channels by expanding access to credit, data inconsistencies together with the size of the system meant closer monitoring was warranted.

“Intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy; but such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions and when their interconnectedness with the regular banking system is strong,” the FSB said in its annual shadow banking report.

While regulators have highlighted that the size of the shadow banking system does not pose a systemic risk on its own, many non-bank lenders obtain short-term funds to invest in longer-term assets, which can trigger fire sales if nervous investors decide to withdraw their money at once.

During the financial crisis, the rapid sell-off reduced asset values and spread the stress to traditional banks, some of which controlled shadow lenders.

Full article: The $75 trillion shadow hanging over the world (The Telegraph)

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