Shadow Banking: Non-bank financial intermediaries grow despite scrutiny
Non-bank financial intermediaries (NBFIs), under scrutiny by regulators in the U.S. and abroad, have played an important role in bridging the funding gap created when banks scaled back lending after the 2008 financial crisis.
The Global Shadow Banking Monitoring Report, published annually by the Switzerland-based Financial Stability Board (FSB), sheds light on the growth of the NBFIs worldwide. In the most recent report, published on October 30, the board estimated that assets of non-bank lending institutions reached a record $75.2 trillion, up from $58.5 trillion in 2008. Furthermore, the report highlights several significant trends within the industry.
The asset classes that grew fastest in 2013 were “other investment funds” and “trust companies.” While the former expanded 18 percent in 2013, the latter grew at a 42 percent rate.
“Other investment funds,” with $29.7 trillion in assets, comprise equity and fixed-income funds, among others, but not money market or hedge funds. The category’s growth probably points to a structural shift in the financial landscape. As pointed out by the International Monetary Fund, this class likely grew amid demand from institutional cash pools created in response to limits on deposit insurance.
Trust companies, a small category with $2.13 trillion in assets, have been at the center of controversy in China, where the government has tried to exert greater control over the industry. Concern centers on the sale of high-yield wealth-management products to well-heeled customers. However, the funds, sometimes based on risky loans, created turmoil in the market and almost caused China Credit Trust Co. to default on a product. About $853 billion worth of trust products in China were about to mature in 2014.
Combined, the euro area, U.S., and United Kingdom represent the bulk of the shadow banking industry, with funds based in those regions holding about 80 percent of all assets in that category as of 2013. In emerging markets, most growth can be attributed to NBFIs operating in China. However, there also has been rapid growth in lending by other financial intermediaries (OFIs).
Although non-banking assets in the U.S. exceed pre-crisis levels, America’s proportion of global OFI assets has declined steadily from 49.9 percent in 2002 to 38.1 percent in 2008 and then 33.5 percent in 2013. Part of this contraction can probably be explained by the reclassification of many financial assets from OFI to deposit-taking bank institutions in 2013.
Lately, the NBFI sector has been under scrutiny because limited data and a lack of transparency often obsure the risks they carry. The FSB has been spearheading regulatory reforms to address the problem. Also, the U.S. the Securities and Exchange Commission is overseeing asset managers such as BlackRock Inc. in an effort to tighten supervision of the sector. Whether a joint effort between FSB and SEC will succeed in monitoring and controlling risks in the industry remains to be seen.