Global Shadow Banking System Rises To $67 Trillion, Just Shy Of 100% Of Global GDP

Tyler Durden's picture

Earlier today, the Financial Stability Board (FSB), one of the few transnational financial "supervisors" which is about as relevant in the grand scheme of things as the BIS, whose Basel III capitalization requirements will never be adopted for the simple reason that banks can not afford, now or ever, to delever and dispose of assets to the degree required for them to regain "stability" (nearly $4 trillion in Europe alone as we explained months ago), issued a report on Shadow Banking. The report is about 3 years late (Zero Hedge has been following this topic since 2010), and is largely meaningless, coming to the same conclusion as all other historical regulatory observations into shadow banking have done in the recent past, namely that it is too big, too unwieldy, and too risky, but that little if anything can be done about it.

Specifically, the FSB finds that the size of the US shadow banking system is estimated to amount to $23 trillion (higher than our internal estimate of about $15 trillion due to the inclusion of various equity-linked products such as ETFs, which hardly fit the narrow definition of a "bank" with its three compulsory transformation vectors), is the largest in the world, followed by the Euro area with a $22 trillion shadow bank system (or 111% of total Euro GDP in 2011, down from 128% at its peak in 2007), and the UK in third, with $9 trillion. Combined total shadow banking, not to be confused with derivatives, which at least from a theoretical level can be said to offset each other (good luck with that when there is even one counterparty failure), is now $67 trillion, $6 trillion higher than previously thought, and virtually the same as global GDP of $70 trillion at the end of 2011.

Of note is that while the US shadow banking system has been shrinking (something our readers are aware of, and a fact which in our opinion implies there is nearly $4 trillion more in Fed monetization still to come, as Bernanke has no choice but to offset the credit destruction within shadow conduits, which in turn are deleveraging to the tune of nearly $150 billion per quarter), that of Europe has been increasing.

The result:

Aggregating Flow of Funds data from 20 jurisdictions (Argentina, Australia, Brazil, Canada, Chile, China, Hong Kong, India, Indonesia, Japan, Korea, Mexico, Russia, Saudi Arabia, Singapore, South Africa, Switzerland, Turkey, UK and the US) and the euro area data from the European Central Bank (ECB), assets in the shadow banking system in a broad sense (or NBFIs, as conservatively proxied by financial assets of OFIs15) grew rapidly before the crisis, rising from $26 trillion in 2002 to $62 trillion in 2007. The total declined slightly to $59 trillion in 2008 but increased subsequently to reach $67 trillion in 2011.

And while the the bulk of the shadow activity is contained within the 3 well-known jurisdictions (US, Europe, UK) whose credit creation capacity in the traditional banking system appears to have ground to a halt, especially in Europe where unencumbered collateral is virtually nil (thus forcing credit creation in the deposit-free, unregulated shadow space), the FSB also found previously unexplored shadow banks in some brand news venus including Switzerland, China and Hong Kong:

Expanding the coverage of the monitoring exercise has increased the global estimate for the size of the shadow banking system by some $5 to 6 trillion in aggregate, bringing the 2011 estimate from $60 trillion with last year’s narrow coverage to $67 trillion with this year’s broader coverage. The newly included jurisdictions contributing most to this increase were Switzerland ($1.3 trillion), Hong Kong ($1.3 trillion), Brazil ($1.0 trillion) and China ($0.4 trillion).

Not unexpectedly, the FSB focuses mostly on Europe, and provides the following color:

The size of the shadow banking system (or NBFIs), as conservatively proxied by assets of OFIs, was equivalent to 111% of GDP in aggregate for 20 jurisdictions and the euro area at end-2011 (Exhibit 2-3), after having peaked at 128% of GDP in 2007.

The summary is by now well-known to most who realize that the primary driver of marginal credit money creation (in Europe) and destruction (in the US) is none other than the world's shadow banking system. As per Bloomberg:

The size of the shadow banking system, which includes the activities of money market funds, monoline insurers and off- balance sheet investment vehicles, “can create systemic risks” and “amplify market reactions when market liquidity is scarce,” the Financial Stability Board said in a report, which utilized more data than last year’s probe into the sector.


“Appropriate monitoring and regulatory frameworks for the shadow banking system needs to be in place to mitigate the build-up of risks,” the FSB said in the report published on its website.

Sadly, shadow banking, like every other unsustainable aspect of the foundering "modern" financial system, will not be fixed, resolved, or in way improved or made sustainable until the entire system crashes.

What is notable, is that for the first time, the issue that is the lynchpin of virtually infinite shadow banking asset "creation" courtesy of rehypothecation, a topic that came to prominence with the MF Global collapse, and which allows infinite ownership chains on the same asset to be created as long as the counterparties are solvent, to fall under the spotlight, especially the legal loophole to create infinite rehypothecation chains with zero haircuts in the UK (hence geographic arbitrage as noted below). To wit:

Requirement on re-hypothecation


“Re-hypothecation” and “re-use” of securities are terms that are often used interchangeably; they do not have distinct legal interpretations. WS5 finds it useful to define “re-use” as any use of securities delivered in one transaction in order to collateralise another transaction; and “re-hypothecation” more narrowly as re-use of client assets.


Re-use of securities can be used to facilitate leverage. WS5 notes that if re-used assets are used as collateral for financing transactions, they would be subject to the proposals on minimum haircuts in section 3.1 intended to limit the build-up of excessive leverage, subject to decisions taken on the counterparty scope and collateral type (sections 3.1.4 (ii) and 3.1.4 (iii), respectively).


WS5 believes more safeguards are needed on re-hypothecation of client assets:

  • Financial intermediaries should provide sufficient disclosure to clients in relation to re-hypothecation of assets so that clients can understand their exposures in the event of a failure of the intermediary. This could include, daily, the cash value of: the maximum amount of assets that can be re-hypothecated, assets that have been re-hypothecated and assets that cannot be re-hypothecated, i.e. they are held in safe custody accounts.
  • Client assets may be re-hypothecated by an intermediary for the purpose of financing client long positions and covering short positions, but they should not be re-hypothecated for the purpose of financing the intermediary’s own-account activities.
  • Only entities subject to adequate regulation of liquidity risk should be allowed to engage in the re-hypothecation of client assets.

Harmonisation of client asset rules with respect to re-hypothecation is, in principle, desirable from a financial stability perspective in order to limit the potential for regulatory arbitrage across jurisdictions [ZH: ahem UK]. Such harmonised rules could set a limit on re-hypothecation in relation to client indebtedness. WS5 thinks that it was not in a position to agree on more detailed standards on re-hypothecation from the perspective of client asset protection. Client asset regimes are technically and legally complex and further work in this area will need to be taken forward by expert groups.

That the FSB has no idea how to regulate infinite rehypothecation should come as no surprise to anyone. After all, enforcing limits on creating "assets" out of thin are would limit the amount of millions Wall Street CEO can pay themselves in exchange for creating soon to be vaporized ledger entries, which they "do not recall" how those got there upon Congressional cross examination.

Finally, perhaps the most important section of all deal with what the FSB terms "Facilitation of credit creation."

Facilitation of credit creation


The provision of credit enhancements (e.g. guarantees) helps to facilitate bank and/or non-bank credit creation, may be an integral part of credit intermediation chains, and may create a risk of imperfect credit risk transfer. Non-bank financial entities that conduct these activities may aid in the creation of excessive leverage in the system. These entities may potentially aid in the creation of boom-bust cycles and systemic instability, through facilitating credit creation which may not be commensurate with the actual risk profile of the borrowers, as well as the build-up of excessive leverage. Credit rating agencies also facilitate credit creation but are outside the scope as they are not financial entities.


Examples may include:

  • Financial guarantee insurers that write insurance on financial products (e.g. structured finance products) and consequently facilitate potentially excessive risk taking or may lead to inappropriate risk pricing while lowering the cost of funding of the issuer relative to its risk profile. – For example, financial guarantee insurers may write insurance of structured securities issued by banks and other entities, including asset-backed securitisations, and often in the form of credit default swaps. Prior to the crisis, US financial guarantee insurers originated more than half of their new business by writing such insurance. While not all structured products issued in the years leading up to the financial crisis were insured, the insurance of structured products helped to create excessive leverage in the financial system. In this regard, the insurance contributed to the creation of large amounts of structured finance products by lowering the cost of issuance and providing capital relief for bank counterparties through a smaller capital charge for insured structures than for non-insured structures. Because of large losses on structured finance business, financial guarantee insurers have in some cases entered into settlement agreements with their counterparties under which, for the cancellation of the insurance policies, the counterparties accepted some compensation from the insurer in lieu of full recovery of losses. In other cases, financial guarantee insurers have been unable to pay losses on insured structured obligations when due. These events exacerbated the crisis in the market.
  • Financial guarantee companies whose funding is heavily dependent on wholesale funding markets or short-term commitment lines from banks – Financial guarantee companies may provide credit enhancements to loans (e.g. credit card loans, corporate loans) provided by banks as well as non-bank financial entities. Such financial guarantee companies may be prone to “runs” if their funding is heavily dependent on wholesale funding such as ABCPs, CPs, and repos or short-term bank commitment lines. Such run risk can be exacerbated if they are leveraged or involved in complex financial transactions.
  • Mortgage insurers that provide credit enhancements to mortgages and consequently facilitate potentially excessive risk taking or inappropriate pricing while lowering the cost of funding of the borrowers relative to their risk profiles – Mortgage insurance is a first loss insurance coverage for lenders and investors on the credit risk of borrower default on residential mortgages. Mortgage insurers can play an important role in providing an additional layer of scrutiny on bank and mortgage company lending decisions. However, such credit enhancements may aid in creating systemic disruption if risks taken are excessive and/or inappropriately reflected in the funding costs of the banks and mortgage companies.

Why is this section so imporant? Because recall that in a Keynesian system, credit creation = money creation = growth. Without "facile" credit creation, there is no growth period. The problem, however, is that the world is approaching its peak credit capacity across the various verticals: sovereign, financial, corporate non-financial, shadow, and of course, household. The reality is that unless some existing debt is not eliminated to make space for future "credit creation", there simply can not be growth, and the problem is that wiping out credit, means the equity tranches below it are worthless. And that is the Catch 22, because wiping out equity somewhere in the world, would have dramatic implications not only on the wealth of the 0.0001% but on credit and faith in a system, which only operates due to the inherent "credit" (hence the name) and "faith" in it. Without those, ultra-modern finance crumbles like a house of cards.

In other words, while the FSB, like any other prudent regulator, is diligently warning about the dangers associated with unprecedented leverage across shadow, and all other systems, in reality what it is saying is that the only way to resolve a record debt problem is... with more debt.

And so we are back to square zero, only this time we are a few trillions dollars closer to complete systemic debt saturation.

* * *

For more on the topic of Shadow Banking, we suggest the following reading material:

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km4's picture

with peak credit capacity achieved what could go wrong ;)

old naughty's picture

"...just shy of 100%..."

Quick, go catch that fish slipped out.

markmotive's picture

...and then there's the shadow shadow banking system. The one built on fraud and white-collar extortion.

Our system is so flawed that fraud is 'mathematically guaranteed'

Supernova Born's picture

Lemmings harken! To the Cliff!

Michaelwiseguy's picture
September 11, 2001: The Crimes of War Committed “In the Name of 9/11? Initiating a Legal Procedure against the Perpetrators of 9/11


The tragic events of September 11, 2001 constitute a fundamental landmark in American history,  a decisive watershed, a breaking point.

Millions of people have been misled regarding the causes and consequences of 9/11.

September 11 2001 opens up an era of crisis, upheaval and militarization of American society. The post September 11, 2001 era is marked by the outright criminalization of the US State, including its judicial, foreign policy, national security and intelligence apparatus.

9/11 marks the onslaught of the “Global War on Terrorism” (GWOT), used as a pretext and a justification by the US and its NATO allies to carry out a “war without borders”, a global war of conquest. 

A far-reaching overhaul of US military doctrine was launched in the wake of 9/11.

9/11 was also a stepping stone towards the relentless repeal of civil liberties, the militarization of law enforcement and the inauguration of “Police State USA”.

In assessing the crimes associated with 9/11 in the context of a legal procedure, we must distinguish between those associated with the actual event, namely the loss of life and the destruction of property on 9/11,  from the crimes committed in the aftermath of September 11, 2001 “in the name of 9/11?.

The latter build  upon the former. We are dealing with two related dimensions of criminality. The crimes committed “in the name of  9/11? involving acts of war are far-reaching, resulting in the deaths of millions of people as well as the destruction of entire countries.

The 9/11 event in itself– which becomes symbolic– is used to justify the onslaught of the post 9/11 US-NATO military agenda, under the banner of the “Global War on Terrorism” (GWOT), not to mention the ushering in of the Homeland police state and the repeal of civil liberties.

The crimes committed in the name of 9/11 broadly consist in two intimately related processes:

1. The launching of the “Global War on Terrorism” (GWOT), used as a pretext and a justification to Wage a War of Conquest. This GWOT mandate was used to justify the 2001 and 2003 invasions of Afghanistan and Iraq. The GWOT mandate has since extended its grip to a large number of countries in Africa, the Middle East and Southeast Asia, where the US and its NATO allies are intervening selectively under a counterterrorism mandate.

2. The derogation of civil liberties and the instatement of an Orwellian police state apparatus within Western countries. In the US, the introduction of the PATRIOT legislation and the establishment of the Department of Homeland Security in the immediate wake of the 9/11 attacks set the stage for the subsequent restructuring of the judicial and law enforcement apparatus, culminating in the legalization of extrajudicial assassinations under an alleged  counter-terrorism mandate.  

The 9/11 attacks constitute what is referred to in intelligence parlance as a “massive casualty producing event” conducive to the deaths of civilians.

The dramatic loss of life on the morning of 9/11 resulting from an initial criminal act is used as a pretext and a justification to wage an all out war of retribution, in the name of 9/11 against the alleged perpetrators of 9/11, namely the “state sponsors of terrorism”, including Afghanistan, Iraq as well as Iran.

We are dealing with a diabolical and criminal project. The civilian deaths resulting from the 911 attacks are an instrument of war propaganda, applied to build a consensus in favor of an outright  war of global domination.  

The perpetrators of war propaganda are complicit in the conduct of extensive war crimes, in that they readily justify acts of war as counter-terrorism and/or humanitarian operations (R2P) launched to protect civilians. The “Just War” (Jus ad Bellum) concept prevails: The killing of civilians in Afghanistan and Iraq are “rightfully” undertaken in retribution for the deaths incurred on 9/11.

Evidence is fabricated to the effect that the “state sponsors of terrorism” had committed, on the morning of 9/11, an outright act of war against the United States.

Realities are turned upside down.  The US and its allies are the victims of foreign aggression. America’s crimes of war in Afghanistan and Iraq are committed in the name of 9/11 under a counter terrorism mandate. 

The 9/11 attacks are used to  harness public opinion into supporting a war without borders. Endless wars of aggression under the humanitarian cloak of “counter-terrorism” are set in motion.

Earl of Chiswick's picture


Dodd Frank fixed the financial system

oh wait Dodd has resurfaced

at your local cinema as a dollar a year man (no make that a $1 every 21 seconds guy 24x7 plus perks + gov pension and perks)

(his mission deliver SOPA in a different form than the SOPA/PIPA he failed to deliver a year ago )

take heed America this man's name is on the most abhorrent piece of legislation since 1913, he will likely succeed in destroying what is left of the internet

Kitler's picture

WS5 believes more safeguards are needed on re-hypothecation of client assets:

Financial intermediaries should provide sufficient disclosure to clients in relation to re-hypothecation of assets so that clients can understand their exposures in the event of a failure of the intermediary.

Very. Very. Bad. Idea.

Tell the Muppets and it's game over tomorrow morning.

Manthong's picture

Dodd has resurfaced..  MPA

Now I have a genuine moral reason to never spend another cent on anything from that industry.

knukles's picture

Damned good thing the Shadow System is approaching 100% global GDP ....

,,,means plenty of money for everybody


James_Cole's picture

"That the FSB has no idea how to regulate infinite rehypothecation should come as no surprise to anyone. After all, enforcing limits on creating "assets" out of thin are would limit the amount of millions Wall Street CEO can pay themselves in exchange for creating soon to be vaporized ledger entries, which they "do not recall" how those got there upon Congressional cross examination."

I don't know where people stand with this stuff. Complain endlessly about gov regulation in capital markets, then complain endlessly about dark pools, now more complaints about shadow banking... 

When it comes to wall street, get the gov out. When it comes to shadow banking...move the government in? I mean everyone understands who makes up and runs the FSB....right? 

People for some reason talking about Dodd-Frank here too... another head scratcher. 

Michaelwiseguy's picture

Full disclosure. That article I posted on the 9/11/2001 story was not vetted by me, just passed on. It may be bogus.

I'm not sure if this is a Mossad Psyop, produced as a diversion to what Israel is currently doing, or to spread disinformation. The group that produced this report was caught red handed producing a report for Mossad titled "Preparing for a Post-Israel Middle East".

“Post Israel” 82 Page Report Bogus Mossad Psyop
No Report was Written – Independent Journalists Fed Story by “Hasbara” Infiltrators

Since the debacle for Israel at the UN meeting, the “Wylie Coyote” Netanyahu presentation, the failed “walkout” during Ahmadinejahd’s speech and the Obama “thumbs down” on “red line” demands, Israel has turned to its long list of infiltrators to attempt to salvage World War III and Mitt Romney.

 First of all, the stories about a secret 82 pages report on titled: Preparing for a Post-Israel Middle East, is a false flag.  There is only one format for such a document and that is a “National Intelligence Assessment.”  No such request has been made, no assessment received by any source and there is no client for such a document.  The answer is simple, this is a “con.”

 The cover story is that 16 intelligence agencies prepared a report which, curiously, reflects a series of articles I have written which describe how much of the US military and intelligence infrastructure has distanced itself from Israel.  However, the bogus report is, in actuality, an attempt to rally American Jews behind “holocaust type” Israeli victimization.

[Editors Note: This means to get the cash registers clinging for dollars in the last stages of the campaign to assure that the Iran War candidate wins and the military and Intel community can be cleansed of all the pesky 'America Firsters'...jd]

three chord sloth's picture

"with peak credit capacity achieved what could go wrong ;)"

Well, peak is good... right?

plaspotje's picture

so thats why we are so bussy contacting alian planets to find more sucker investors .

CPL's picture

It's spelled B U S Y.


And you replied to your own post instead of editing it.

plaspotje's picture

@ CPL, thanks for helping out here,,,  sounds like i have 2 wifes now ,,, but i have not found that edit option,,  even reading this website in China has its  problems , posting a comment or anything like that is even harder.

thanks for the help anyway ..

found it ....!!!!!

Bollixed's picture

He probably got discumboobulated when he read this sentence in the article..."and assets that cannot be re-hypothecated, i.e. they are held in safe custody accounts."

insanelysane's picture

A few more super storms, tsunamis, volcanoes, and if in a rush, all out war in the western world will destroy enough infrastructure to reset the economy.

ekm's picture

So, the core of the problem is "infinite re-hypothetication". The challenge is: How to regulate "infinite re-hypthetication".


Now, why is it so difficult to understand that INFINITY CANNOT BE REGULATED by ................ humans? Somebody else regulates "infinity", but not humans.

Guess who?


three chord sloth's picture

Regulate infinity?!? Hell, humanity cannot even regulate 3... let alone anything higher.

spanish inquisition's picture

Don't worry, its all off setting. If it doesn't match, the leftover 14 rehypothecations of a transaction will all get gold bar number 148962235a that every transaction was using as collaterol. Hmm, seems like a lot.. Thinking about it, if I invented the whole rehypothecation/derivitive thing, I would of written that my original document in the chain of rehypothetication has primary rights to the assets. I would also like to be holding on to that bar for no particular reason.

GrinandBearit's picture

I say fuck it all back to the stone age.  The whole system needs a good honest cleanout.

willwork4food's picture

OK, but I still want my beer cold..

Water Is Wet's picture

I have lost all perception of value when it comes to money.  $67 trillion?  Yeah, ok.  Whatever.  And hey, AMZN is a $100 billion company that doesn't make any money.  Ditto  Add in your favorite scam.  And oh, by the way, $16 trillion of U.S. debt, but hey they can pay it back 'cause they have a printing press... I've been trying to keep my cash holdings to a minimum, and focusing on enjoying myself before I'm dead.  I'm just not very good at it at the moment.

Seasmoke's picture

Japan laughs at your chart !

three chord sloth's picture

Like conman said, when the line is going up... that's always good!

Conman's picture

I thought it was good when the lines go from bottom left to upper right?

vinayjha's picture

President is on break till Nov 25th. There goes 7 day. US will be Greece

knukles's picture

Needs 7 more days?
For shits sake, been on vaycay for 4 years

DanDaley's picture

Not to worry, his puppeteer controllers are working.

Yellowhoard's picture

Jamie Dimon will figure all of this out and there will be HoHos and Little Debbie's and cream filled Twinkies for all of us!

Sean7k's picture

And if the 80% plus of the people that have zero risk (outside of sovereign imposed taxes that could be ignored) who really loses when it all collapses? The bankers, the uber wealthy.

Most of the jobs in America are provided by small business. We might just ride it out with considerable tragedy, but the NWO? They could end up vipers in a pit, set upon each other. 

Sometimes, the best answer lies in no action whatsoever. Got farm? Got real money? Got community? 

Prepare for the worst and hope for the best, but let the fascists fry!

willwork4food's picture

No they won't. The uber wealthy have the best information to understand what/when and how things will play out. They will also have invested in alot of PMs prior to the collapse, guaranteeing not only their survival but the new kid on the block with all the gold.

Sean7k's picture

Yes, but without the influence provided by the control of the political economic apparatus. Will they have capital? Yes, but will they be able to determine events? Perhaps not. Regardless, the haircuts will fall and have a great impact. Plus, we would no longer live in the shadow of their debt slavery.

They need the system much more than we do.

willwork4food's picture

I don't know about that. It's like saying Ted is against a hyper-inflation collapse because it would destroy the same people that directly benefit from the fiat currency. However, THEY would be in the unique position to know when it was going to happen, therefore alowing them to liquidate all cash for assets prior.

jbvtme's picture

ann barnhardt takes no prisoners...  see economic presentation in eight parts 11/9/12

Bollixed's picture

I tried watching that the other day, but when she got to the part where her solution was to ram Christian values down everyone's throat her credibility on the issues went out the window. Why does everyone think 'their' god is always the only solution. If someone wants to believe in god that's their business, but don't cloud the issues with righteous morality dogma based on singular narrow view.

Trichy's picture

Shadow banking in europe is a derivative of the world forcing pension funds to hunt for returns being squeezed between zirp (or defaulted upon in the case of Greece) and being under funded (ponzied).
Europeans will be shocked, shocked... to find out the truth.
Good luck politicians and CBs. (Your printing wont help here)

booboo's picture

image a sausage stuffer, out the nozzle and feeding right back into the hopper, but before it enters back into the hopper it is being sold to blind bystanders for delivery tomorrow. The kicker is that the bystanders are using their claim as collateral to buy more sausage.

centerline's picture

Oh, come on.  Let's count all the counterparty bets.  Or at least assign some $ value to the risk.

Yeah, I get it.  Even without this we are at 100 percent global GDP.  But, we all know it is the the counterparty exposure that will sink the ship when the time comes.

freewolf7's picture

namely that it is too big, too unwieldy, and too risky, but that little if anything can be done about it

Oh, good. Whew. Thought I'd be asked to do something about this.

We are so hypnotized.

willwork4food's picture

Where is everyone? Football games? Actual real time social life with real people?


 why do I feel this article is the mother of all articles with proof the shit will hit the fan soon?


q99x2's picture

Looking pretty gnarly. May I suggest a haircut?

willwork4food's picture

I'm pretty sure that's guaranteed.