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Heading into the Covid-19 pandemic, the global shadow banking sector was growing faster than the traditional banks, accounting for almost half of global financial assets, says the Financial Stability Board (FSB), an international body that monitors the global financial system.

The FSB published a report thats examined the state of shadow banking — a term that refers to non-bank financial institutions — and found that in 2019 the sector grew by 8.9% to US$200.2 trillion.

Globally, the shadow banks represented 49.5% of total financial assets, up from 42% in 2008. In more than one-third of jurisdictions, shadow banks’ share of assets was over 50%.

The rise in shadow banking assets was “driven mainly by increases in investment funds, pension funds and insurance corporations,” the FSB said.

The so-called narrow measure of non-bank financial institutions — which refers to a sub-sector of shadow banking that may pose bank-like financial stability risks, or regulatory arbitrage — grew even faster, rising by 11.1% to $57.1 trillion in 2019.

This was well ahead of the average annual growth rate of 7.1% in the previous five years.

“This growth was driven mainly by collective investment vehicles with features that make them susceptible to runs,” the FSB said.

These vehicles, which include hedge, money market and other investment funds — grew by 13.5% in 2019, and represented 72.9% of narrow shadow banking.

The FSB said that, while the report is largely based on data that predate the pandemic, it helps explain some of the vulnerabilities revealed when the markets were roiled by the pandemic.

“The market turmoil witnessed in March 2020 also highlighted how certain [non-bank] entities or activities give rise to vulnerabilities that can amplify shocks, both directly and through their linkages with other parts of the financial system,” the report said.

For instance, as funding markets came under acute stress in March, some investment funds suffered large outflows, it said.

This included a surge in redemptions from money market funds and fixed-income funds, “particularly those that offer daily redemptions and invest in less liquid assets.”

“The Covid-19 shock highlights the importance of monitoring developments in the non-bank financial intermediation sector from a financial stability perspective,” the FSB said.