## IMF Survey : Shadow Banking Is Boon, Bane for Financial System

_IMF News, October 1, 2014_

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## Bibliographic details
- Published: October 1, 2014

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### Overview
- Publication date: October 1, 2014.
- Shadow banking: entities that act like banks by taking money from investors and lending it to borrowers but are not governed by the same rules or supervised.
- Examples of shadow banks: money market mutual funds, hedge funds, finance companies, and broker/dealers.
- The IMF’s Global Financial Stability Report analyzes recent growth in shadow banking in advanced and emerging market economies and associated risks.

### Size and measurement
- United States: shadow banking amounts to between 15 and 25 trillion dollars (depending on the measure).
- Euro area: between 13.5 and 22.5 trillion.
- Japan: between 2.5 and 6 trillion.
- Emerging markets: around 7 trillion.
- In emerging markets, shadow banking growth is outpacing that of the traditional banking system.
- China: shadow banking size between 35 and 50 percent of GDP; growth over 20 percent per year.

### Drivers of growth
- Common drivers across countries:
  - Strict banking regulations that encourage circumvention.
  - Low real interest rates and low yield spreads prompting investor searches for higher returns.
  - Large institutional demand for "safe assets," e.g., from insurance companies and pension funds.
- Quote: “We found that the same factors often seem to drive the growth of shadow banking across countries,” — Gaston Gelos, chief of the Global Financial Analysis Division at the IMF.

### Risks and systemic contribution
- Reliance on short-term funding can lead to forced asset sales and downward price spirals when investors seek rapid withdrawals.
- United States: shadow banking accounts for at least a third of total systemic risk (measured as extreme losses to the financial system that occur with a very low probability), similar to that of banks.
- Euro area and United Kingdom: contribution to systemic risk from shadow banking is much smaller relative to risks from their banking systems.
- Since 2009, non-money market investment funds have grown fastest in advanced economies:
  - United States: from 35 to 70 percent of GDP.
  - Euro area: from 35 to 65 percent of GDP.
- Trend toward funds holding higher proportions of less-liquid assets (for example, commercial loans), particularly in the euro area and observed similarly in the United States.
- Liquidity mismatch risk: liquid claims to investors backed by less-liquid assets can lead to runs and fire sales if many investors redeem simultaneously.

### Benefits
- Broadens access to credit, especially in emerging market economies with constrained traditional banking networks (capacity or regulatory constraints such as restrictions on lending or on interest rates).
- In advanced markets, various types of funds have been providing long-term credit to the private sector as banks lend less.
- Shadow banking can deepen market liquidity and improve risk sharing, increasing financial system efficiency.

### Policy recommendations and supervisory implications
- Monitor shadow banking as part of policies to keep the overall financial system safe.
- Degree of oversight and regulation should depend on how much shadow banking contributes to systemic risk, in line with Financial Stability Board recommendations.
- Implement a macroprudential framework to detect shifts of shadow banking into less-regulated areas.
- Joint action required: macroprudential and microprudential supervisors need to work together.
- To assess risks properly, supervisory authorities and statistical agencies must provide much more detailed data on shadow banking.
- International regulatory cooperation is crucial to prevent risk migration when regulatory initiatives are implemented by only a few countries or are poorly coordinated.
- Regulatory tightening in one country may lead to migration of activities to others with laxer rules.
- Governments have begun to put in place rules to address the risks through the work of the Financial Stability Board.

*Source: IMF Survey, "Shadow Banking Is Boon, Bane for Financial System", October 1, 2014.*

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## Content in this bundle

- [Pol100114acpdf (PDF)](/-/media/websites/imf/imported/external/chinese/pubs/ft/survey/so/2014/pol100114acpdf.pdf){rel="external" type="application/pdf"}
- [C2pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/gfsr/2014/02/pdf/_c2pdf.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Policy](https://www.imf.org/en/news/search)
- [What are shadow banks?](http://www.imf.org/external/pubs/ft/fandd/2013/06/basics.htm)
- [Shadow banking in China](http://blog-imfdirect.imf.org/2014/09/15/whats-lurking-in-the-shadows-of-chinas-banks/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol100114a_