Shadow banking poses systemic risks

Shadow banking poses systemic risks

Regulation of the shadow banking sector is important to almost half of financial professionals in the UK, according to a survey conducted by the CFA Institute.

The Chart shows responses from respondents on a regional basis. This sentiment is strongest in Asia Pacific, where 93 per cent of respondents indicated regulation of shadow banking is either important or very important.

“The big problem with shadow banking is that it is subject to the equivalent of bank runs, like the one in 2008,” said Vikram Mansharamani, a global equity investor and a lecturer at Yale University. “But unlike regulated banking which has access to ‘lenders of last resort’ that can alleviate liquidity pressures – pressures that naturally arise from modern fractional banking – a shadow banking crisis is more likely to snowball into potentially systemic risks.”

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The survey asked 625 respondents which shadow banking issue posed the greatest systemic risk over the next two years. Almost 25 per cent pointed to the potential default of Chinese trust and wealth management products, while a further 25 per cent said collateral innovation. The remaining 50 per cent were divided between money market funds, synthetic exchange-traded products with leverage or inverted return features and hedge fund leverage.

The Financial Stability Board (FSB) estimates the size of the shadow banking sector globally to be approximately $75tn (£43tn) as at the end of 2013. The International Monetary Fund (IMF) in its Global Financial Stability report published in April said the sector poses risk to financial stability and monitoring of it still remains inadequate.

Britain’s shadow banking sector is more than twice the size of any other economy as a share of GDP, the IMF added. At the end of 2013, shadow banking accounted for around 7 per cent of risk in the UK.

Part of the rise in this sector is due to growth in peer-to-peer online lending to households and small businesses. According to the IMF, the P2P lending market is currently small with only about $6.5bn (£4.1bn) outstanding at the end of March 2014 and its potential for growth is large.