From the International Monetary Fund's iMFdirect blog:
Shadow banking has grown by leaps and bounds around the world in the
last decade. It is now worth over $70 trillion. We take a closer look
at what has driven this growth to help countries figure out what
policies to use to minimize the risks involved.
In our analysis, we’ve found that shadow banks are both a boon and a
bane for countries. Many people are worried about institutions that
provide credit intermediation, borrow and lend money like banks, but are
not regulated like them and lack a formal safety net. The largest
shadow banking markets are in the United States and Europe, but in
emerging markets, they have also expanded very rapidly, albeit from a
low base.
In our latest Global Financial Stability Report we discuss three ways of measuring the size of shadow banking:
- The Financial Stability Board offers a broad definition of shadow
banks as nonbank financial intermediaries engaged in credit
intermediation (including investment funds), and a more narrow one which
excludes entities which do not directly undertake credit intermediation
or which are consolidated into banking groups.
- We compute another measure, derived from flow of funds accounts, for
a smaller set of countries. It focuses on “other financial
intermediaries” and excludes non-money market investment funds, since
the latter mainly manage assets on behalf of clients and thus do not
engage directly in credit intermediation.
- Lastly, we propose a new, alternative definition of shadow banking
as financial activities using nontraditional funding, independently of
the financial institution involved. The focus on activities is one
advantage of this approach. For example, securitization is classified as
shadow banking, whether it is conducted on-balance sheet by banks, or
off-balance sheet through special purpose vehicles.
These measures show some notable differences. They all share a
similar growth trend until 2007, after which their paths diverge
markedly (Figure 1). After a mild drop around 2008, the Financial
Stability Board’s measures now surpass their pre-crisis levels. Positive
valuation effects are one of the reasons behind the pickup in the
Financial Stability Board’s measures, given the growth in the investment
fund industry.
In contrast, our measures remain broadly constant or have fallen,
which reflects two opposing forces: the decline in the role of certain
activities after the crisis, such as securitization and securities and
repo lending, and a concomitant rise in other activities, including
those of country-specific entities, such as special financial
institutions in the Netherlands and U.S. holding corporations....MORE
