Share

IMF warns on growth of shadow banking

Washington - Lightly regulated "shadow banking" has grown to huge proportions in the global financial system and increasingly poses a risk to stability, especially in the United States, the IMF said Wednesday.

As much as $60trn in assets are handled by shadow banks around the world, according to a statement by the International Monetary Fund.

The sector includes legal but lightly policed institutions like mutual funds, money market funds, wealth management funds in China, and finance companies in emerging economies, that take money from investors and lend it like banks.

They have grown larger in the extremely low interest-rate environment of the past six years, as investors seek higher yields on their money and banks tighten up under tougher post-crisis regulation.

But the International Monetary Fund says in a new report that the risks are high because shadow banking largely depends on short-term funding. In a scare, it says, the impact of panic withdrawals can snowball into the broader financial system and global economy with outsized impact.

That was seen in the financial crisis in 2008, when US money market funds which were important lenders in Europe faced large redemptions, and with the near-collapse of companies like insurer AIG.

Since the crisis the power of shadow banks has only grown, the IMF report notes.

In the United States, shadow banks have nearly twice as much assets than banks, and in the eurozone their assets have reached 60% of the banks.

In developing countries the figure is close to 60%. The sector has rocketed in China, where banks face interest rate controls, pushing savers to seek better returns on their money outside the banks. The IMF estimates shadow banking amounts to 35% to 50% of China's gross domestic product.

"Shadow banking in China stands out and warrants close monitoring," the report said.

"Shadow banking tends to take off when strict banking regulations are in place, which leads to circumvention of regulations," said Gaston Gelos, chief of the Global Financial Analysis Division at the IMF.

"It also grows when real interest rates and yield spreads are low and investors are searching for higher returns."

The report said shadow banking serves a good purpose, broadening access to credit, especially in emerging-market economies.

But it said authorities need to have more information on the sector to gauge the level of systemic risk, and to regulate where possible.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Voting Booth
Do you think corruption-accused National Assembly Speaker Nosiviwe Mapisa-Nqakula will survive a motion of no confidence against her?
Please select an option Oops! Something went wrong, please try again later.
Results
No, her days are numbered
41% - 570 votes
Yes, the ANC caucus will protect her
59% - 816 votes
Vote
Rand - Dollar
18.88
+0.3%
Rand - Pound
23.86
+0.2%
Rand - Euro
20.39
+0.2%
Rand - Aus dollar
12.33
+0.1%
Rand - Yen
0.12
+0.2%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE