This deceleration is due to the slowdown in its main driver: investment funds, according to the latest report from the Financial Stability Board. The activities carried out outside the banking system today weigh 50.900 billion dollars in the world. But the outlines of these professions remain opaque.
This is a first in nine years. The growth of shadow finance, often referred to as “shadow banking”, slowed sharply in 2018. According to the annual report of the Financial Stability Board (FSB), published on Sunday, it stood at 1.7%, against 14 % in 2017 and an average of 8.5% per year between 2012 and 2017.
According to the FSB’s “narrow definition”, this activity, which operates outside the traditional banking system, represented $ 50.9 trillion in 2018, against $ 50.050 billion the previous year. That is 13.60% of all global financial assets (378.9 trillion dollars), against 13.52% in 2017.
“Non-banking institutions play an increasingly important role in the global financial system ”, however tempers Klaas Knot, president of the central bank of the Netherlands and head of the vulnerabilities committee within the FSB.
Shadow finance passes the $ 50 trillion mark
This slowdown is mainly due to the slowdown in the growth of its main engine: investment funds. Their activity represents more than 72% of “shadow banking” and grew by only 0.4% over the year, against more than 10% on average in previous years. In question, the fluctuation of the world exchange rates, in spite of an increase in the financial flows of the sector.
Identify the contours
The work of the FSB, created by the G20 in the wake of the 2008 crisis, has been for nine years to draw the portrait of “shadow banking” and assess the risks it could pose to the global financial system. The rout of the insurance company AIG indeed showed how the financial activities carried out outside the banking sector could be destabilizing.
But the task of the FSB is not easy as the necessary data are so complicated to retrieve and compare. Luxembourg has therefore only been in the field for three years. Today, the FSB’s report covers 29 jurisdictions that make up 80% of global GDP.
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According to the report, the United States is still home to the main players in “shadow banking”, with $ 15.2 trillion in 2018, or 30% of the total. The second player is none other than China, with $ 7.8 trillion for 15.4% of the total. “The American share has been steadily decreasing since 2014, while that of China and Ireland, on the contrary, continues to increase », notes the report.
At the end of December, the FSB also warned of the risks associated with leveraged loans – in other words loans to companies already heavily indebted – and to CLOs, products created by assembling these same loans. This market has grown significantly in recent years, notes the international institution, and the role played by non-banking players in it has also grown.