Canada’s shadow banking sector has grown substantially in recent years, but the overall financial system has grown even faster, keeping risks in check, suggests a new report from the Bank of Canada.
In the report, the central bank details the results of its monitoring of so-called “non-bank financial intermediation” (NBFI), also known as shadow banking. Among other things, the report finds the Canadian NBFI sector has grown by 1.7 times since 2006, driven by strong growth in investment funds, securities financing transactions and private lending.
Yet, the report also indicates the sector’s share of both bank assets and total financial assets has declined over that same time period, tempering risk concerns.
“In Canada, the decline in the share of NBFI assets relative to the overall financial system suggests a higher percentage of the Canadian financial system is subject to prudential supervision,” it says.
Nevertheless, the bank also indicates it will continue to monitor the shadow sector for emerging signs of systemic stress.
“Although a declining NBFI footprint suggests less risk, it is not sufficient to guarantee future financial stability. The financial system constantly innovates and adapts, and risky activities can move to the shadows,” the paper says.
For instance, the paper notes that the bank has studied recent innovations, such as the emergence of robo advisors and crowdfunding, and concluded that they do not fit its definition of NBFI. And, while peer-to-peer lending does meet the definition, it remains very small within the Canadian financial system.