Regulators Identify Data Needs to Track Shadow Banks

Firms doing bank-like activities outside banking system can pose systemic threat

Such shadow banking operations have grown dramatically

Regulators need more, different data to understand fast-changing sector

Participants at a September 23 panel, “Casting Light on Shadow Banking: Data Needs for Financial Stability,” recalled that bank-like activities carried out by nonbank financial institutions in the U.S. mortgage market were the catalyst for the biggest global financial crisis since the Great Depression.

Yet they noted that risk that these so-called shadow banks—such as insurance companies, money market funds, hedge funds and investment banks—took on, and the implications for the stability of the financial system, were not well understood, even though their activities were expanding sharply.

Colombia’s central bank Governor Jose Dario Uribe: outside regular banking system, prudential regulatory standards are less formally applied (IMF photo)

For example, in the decade before the 2007 breakdown in the U.S. mortgage market, shadow banking liabilities in the United States quadrupled, “growing all out of proportion to the liabilities in traditional banks,” Richard Berner, Counselor to the U.S. Treasury Secretary, told the panel.

Much the same as banks

Firms engaged in shadow banking do many of the same things as banks—such as gathering funds from those with money to invest and lending those funds to borrowers, or transforming short-term funds into long-term assets. In other words, like banks, they intermediate between those with money and those who want to borrow it. But they do so “outside the regular banking system … in an environment where prudential regulatory standards are either not applied or less formally applied,” according to José Dario Uribe, Governor of Colombia’s central bank, Banco de la República.

Moreover, there is not a clean separation between traditional banking and the rest of the financial sector. Banks often provide financing to securities firms and other nonbank financial institutions carrying out bank-like activities.

Bank of England Deputy Governor Paul Tucker: ‘Regulatory arbitrage is endemic and it’s impossible to push that tide back’ (IMF photo)

Shadow banking will continue to grow, said Paul Tucker, Deputy Governor for Financial Stability of the Bank of England. Borrowers and lenders will seek out less heavily regulated, and therefore often cheaper, venues. “Regulatory arbitrage is endemic and it’s...