Call it Monitoring Universe of Non-Bank Financial Intermediation (MUNFI), Other Financial Intermediaries (OFI), non-bank financial intermediation or, easiest of all, by its widely accepted name, Shadow banking. Whatever you want to call it, the latest just released estimate by the Financial Stability Board [5]of how many assets current exist outside of the regular banking system (and are thus in the shadows) around the globe should explain why these day the one thing central bankers are most worried about is the uncontrolled proliferation of shadow assets (technically it is liabilities, but that is a different discussion). The reason: according to the broadest measure of shadow banking, it grew by $5 trillion in 2013 to reach $75 trillion. This represents some 25% of total financial assets and when expressed in terms of global GDP, it amounts some 120% of global GDP.
We are not exactly sure which is scarier: that total financial assets amount to about 500% of world GDP or that about $75 trillion in financial leverage is just sitting there, completely unregulated and designed with one purpose in mind: to make billionaires into trillionaires (with taxpayers footing the bill of their failure).
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Some of the other findings:
- MUNFI assets grew by 7% in 2013 (adjusted for foreign exchange movements), driven in part by a general increase in valuation of global financial markets. In contrast total bank assets were relatively stable. Within the headline global growth figure of MUNFI assets exists considerable differences across jurisdictions and entities.
- This year, the FSB continued to refine the shadow banking measure to produce an estimate that more tightly focuses on shadow banking risks, narrowing down the broad MUNFI estimate by filtering out entities that are not part of a credit intermediation chain and those that are prudentially consolidated into a banking group. Using more granular data reported by 23 jurisdictions, the broad MUNFI estimate of non-bank financial intermediation was narrowed down from $62 trillion to $35 trillion.
- Based on the narrowed down estimate, the growth rate of shadow banking for this smaller sample in 2013 was +2.4%, instead of +6.6% for the MUNFI (using the same smaller sample). The narrowing down approach remains work in progress and will improve further over time.
- By absolute size, advanced economies have the largest shadow banking sectors, while emerging market jurisdictions recorded the fastest growth rates (albeit from a relatively small base). While the non-bank financial system may contribute to financial deepening, careful monitoring is still required to detect any increases in systemic risk factors (e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit provided by the non-bank sector.
- Trust Companies and Other Investment Funds were the fastest growing sub-sectors globally in 2013. Trust Companies have consistently grown at a fast pace, whereas the 18% annual growth in Other Investment Funds, the largest sub-sector, was sharply higher than in the preceding years.
- The Hedge Funds sub-sector remains significantly underestimated in the FSB’s data collection exercise. Further refinement of the data for this sector could provide important additions to future editions of this report
And here is why even the report above is woefully underestimating to summarize the epic leverage in the system:
Hedge Fund assets amounted only to $0.1 trillion in 2013, according to jurisdictions’ submissions for the macro-mapping exercise. However, the size of the sector in the FSB’s exercise is significantly underestimated primarily due to two factors. First, off-shore financial centres, where most Hedge Funds are domiciled, are not included in the current scope of the exercise. Second, the Flow of Funds statistics are not granular enough in many jurisdictions to allow a separation between Hedge Funds and other sectors. Last year’s report referenced results from IOSCO’s Hedge Fund survey which provided a more representative picture of the sector. Updated estimates for 2014 are currently not available, but the IOSCO has launched a new survey which should provide an overview of the global Hedge Fund industry. Information is expected to be available in the first half of 2015. However, data from a private sector source (Hedge Fund Research) show that globally assets under management in this industry amounted to $2.6 trillion at the end of 2013. The U.S. and the United Kingdom, which hold the great majority of global Hedge Fund assets, published results from national Hedge Fund surveys in 2014. In the case of the United Kingdom, the Financial Conduct Authority’s report shows that approximately $470 billion of Hedge Fund assets were managed in the United Kingdom. While data collected by the US Securities and Exchange Commission (SEC) show that registered investment advisors managed $5 trillion of Hedge Fund assets. Note that these numbers are from different sources with generally different methodologies and survey coverage, and are therefore not necessarily comparable.
So just call it $80 trillion in shadow banking exposure.
