Sunday 19 November 2017

Shadow banking activity grows in the Eurozone

European Central Bank (ECB) headquarters in Frankfurt. Photo: Bloomberg
European Central Bank (ECB) headquarters in Frankfurt. Photo: Bloomberg
Colm Kelpie

Colm Kelpie

The size of the non-bank financial sector in the Eurozone more than doubled in terms of assets in the decade between 2003 and 2013 to €19 trillion, due in part to the substantial growth of shadow banking, a new paper published by the Central Bank states.

The report also claims that a large portion of the sector remains unmapped.

Shadow banking is a catch-all term used to describe a host of non-bank finance houses engaged in bank-like activities.

These can include asset managers, hedge funds and insurers but also, increasingly, new internet-based financial platforms where borrowers and lenders meet to exchange funds without the need of a bank intermediary.

Drawing on research from the European Central Bank (ECB), the new academic paper published by the Central Bank of Ireland points out that the scale of the non-bank financial sector has surged, with assets increasing from €9 trillion in 2003 to a massive €19 trillion in 2013. "This in part reflects the growth of shadow banking activity in the euro area as financial institutions adjust their activities and corporate structures in light of the increased regulatory requirements of the banking sector," the paper noted.

At a conference earlier in the year, regulators said shadow banking is emerging as an important source of credit for the real economy at a time when capital-strapped banks are reluctant to lend.

In efforts to prevent a repeat of the global financial meltdown of 2007-2008, regulators and central banks have extended their reach to the huge network of funding channels that operate outside the traditional banking realm.

But such non-bank investors have largely been spared the regulatory ramp-up banks have seen since the 2008-2009 financial crisis that required them to hold more capital.

That has led to concerns, often among banks, that there is not a level playing field among financial market players, with shadow banks getting off lightly to their advantage.

The report from the Central Bank examined the location of the financial activities of multinationals using the non-bank financial sector in Europe and found that it was very concentrated, with the Netherlands, Ireland, the UK, France and Germany accounting for 75pc of the total sample studied.

The Netherlands was the chosen host for 38.5pc of foreign investments in the non-bank financial sector, with close to 95pc relating to the activities of financial holding companies. (Additional reporting Reuters)

Irish Independent

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