October 1, 2014 / 1:02 PM / 3 years ago

Need to monitor, not stifle shadow banks, IMF says

WASHINGTON, Oct 1 (Reuters) - Regulators should keep a close watch over the shadow banking system to protect its useful functions without any undue risks to the financial system, the International Monetary Fund said on Wednesday.

Shadow banks are a loosely defined group of financial industry operators that provide credit without officially being banks, such as hedge funds, money market funds, finance companies and securitization vehicles.

Much of the short-term funding provided to now defunct investment bank Lehman Brothers originated in the unregulated shadow banking industry, making it a central contributor to the 2007-09 financial crisis.

Shadow banks also had benefits, however, the IMF said in its Global Financial Stability Report, providing funding as banks keep tight reins on lending. In underbanked emerging markets, shadow banks could broaden access to credit.

Six years after the financial system blew up, shadow banking posed at least a third of the total systemic risk - measured as extreme losses that occur with a very low probability - roughly the same as official banks, the IMF said.

The size of U.S. shadow banks was between $15 trillion and $25 trillion, depending on what definition is used, the IMF said. In the euro area, it stood between $13.5 trillion and $22.5 trillion, and in Japan between $2.5 trillion and $6 trillion.

The risk emanating from shadow banks in Europe was much smaller than that arising from official banks, however, reflecting the fact that companies there rely on bank funding to a much bigger degree than in America.

The sector was now stagnant, or picking up, again depending on the various gauges regulators use. In emerging markets, shadow banks were growing strongly, the IMF said.

Tighter regulation after the crisis was one reason why shadow banks still grew as institutions circumvented the new rules by going through unregulated entities.

Also, shadow banks could often provide the more lucrative - and more risky - assets that investors were looking for, as interests rates in the main economies remain low.

The IMF urged global regulators to cooperate to monitor shadow banks. They should make better data available, and those in charge of the well-being of individual companies - so-called microprodential regulators - should work with their macroprodential peers who oversee the entire system. (Reporting by Douwe Miedema)

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