The system of so-called "shadow banking" blamed for
aggravating the global financial crisis grew to $67 trillion
globally last year, a new high, amid calls from the world's
top policymakers for greater control of the sector.
A report by the Financial Stability Board (FSB) appeared to
confirm fears among policy makers that shadow banking is set
to thrive, beyond the reach of a regulatory net tightening
around traditional banks and their activities.
Officials at the European Commission in Brussels see closer
control of the sector as important in preventing a repeat of
the financial crisis that toppled banks over the past five
years and rocked the euro zone.
The study by the FSB, set up by the world's top economies
(G20) to police global finance, said shadow banking around
the world more than doubled to £62 trillion in the five years
to 2007 before the crisis struck.
But the size of the total system had risen to $67 trillion in
2011, more than the total economic output of all the
countries in the study.
The multi-trillion dollar activities of hedge funds and
private equity companies are often cited as examples of
But the term also covers investment funds, money-market funds
and even cash-rich firms that lend government bonds to banks,
and which in turn use them as security when taking credit
from the European Central Bank
Even the man credited with coining the term, former
investment executive Paul McCulley, gave a catch-all
McCulley said he understood shadow banking to mean "the whole
alphabet soup of levered up non-bank investment conduits,
vehicles and structures", such as the special investment
vehicles that many blamed for the financial crisis.
The United States had the largest shadow banking system, said
the FSB, with assets of $23 trillion in 2011, followed by the
euro area - with $22 trillion - and the United Kingdom - at
The U.S. share of the global shadow banking system has
declined in recent years, the FSB said, while the shares of
the United Kingdom and the euro area have increased.
The FSB warned that tighter rules that force banks to hoard
more capital reserves to cover losses could bolster shadow
It advocates better controls, although cautions that shadow
banking reforms should be dealt with carefully because the
sector can also be a source of credit for business and
Forms of shadow banking can include securitisation, which can
transform bank loans into a tradeable instrument that can
then be used to refinance credit, making it easier to lend.
In the run-up to the crisis, however, banks such as Germany's
IKB stored billions of euros of such instruments in
off-balance sheet vehicles, which later unravelled.
Another example is a repurchasing agreement, or repo, where a
player such as a hedge fund could sell government bonds it
owns to a bank, agreeing to repurchase them later.
The bank may then lend those bonds onto another hedge fund,
taking a position on the government debt. Such agreements are
used by banks to lend and borrow. A risk could arise if one
of the parties in the chain collapses.
The European Commission is expected to propose EU-wide rules
for shadow banking next year.