Oct 31 2011

Shadow banking is bigger than before the crisis

Posted by: Nick Shaxson in: Thoughts

I am planning to write about the protests in London – which I am a big fan of. I should have written earlier, but have been travellling (and ill). For now, I’ll point to a disheartening headline that I read on my travels: Shadow banking surpasses pre-crisis level. In the FT:

The shadow banking system, the host of lightly regulated entities that compete with banks to provide credit, is bigger than it was before the financial crisis, despite growing efforts by regulators to rein it in, a report from the Financial Stability Board shows.

(The FSB report is here.) How big is the shadow banking system? Well, in an analysis that is based on studying several large economies, the FSB reports:

According to one measure of the size of the shadow banking system, it grew rapidly before the crisis, from an estimated $27 trillion in 2002 to $60 trillion in 2007, and remained at around the same level in 2010.

The FT adds more:

It now constitutes more than a quarter of the entire financial system and is about half the size of traditional banks.

Phew. Basically, shadow banking is banking that happens outside regulation. One might looseley say that this means banking that happens outside of democracy and the social contract. Which is why I, with my antennae out for escape routes from things such as financial regulation via tax havens, have taken a bit of an interest in it. The shadow banking system is partly responsible (as are, admittedly, so many other things) for the financial crisis we’ve been experiencing, as the FSB notes:

the risks in the shadow banking system can easily spill over into the regular banking system . . . these risks are amplified as the chain becomes longer and less transparent. The shadow banking system can also be used to avoid financial regulation and lead to a build-up of leverage and risks in the system.

And the FT adds:

Regulators fear it remains a major threat to long term stability, particularly as more activities move out of the traditional banking sector to escape tighter regulation there.

One to be depressed about. And perhaps to protest about. More on this general subject soon, once this backlog has been tackled.

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