Raise and fall of business indicators green and red arrows

For the first time since the financial crisis, the shadow banking sector saw its assets decline last year, the Financial Stability Board (FSB) reports.

The group’s latest annual monitoring exercise found that the non-bank financial intermediation sector — often known as shadow banking — experienced its first “notable decrease” since 2009.

The total financial assets of the shadow banking sector declined by 5.5% year-over-year in 2022 to US$217.9 trillion.

The drop “can be largely attributed to higher interest rates,” which reduced asset valuations, the FSB said.

Indeed, the group said the shadow banking sector’s asset decline was primarily reflected in “valuation losses in mark-to-market asset portfolios, particularly in investment funds.”

Alongside the decline in the overall value of the shadow banking sector’s assets, its share of total global financial assets also decreased from 49.8% to 47.2% in 2022.

At the same time, the FSB reported that the narrower measure of the shadow banking sector — the firms that are involved in the sort of credit intermediation that can pose bank-like financial stability risks — also saw assets decrease by 2.9% to US$63.1 trillion in 2022.

“This decline can be almost entirely attributed to collective investment vehicles susceptible to runs, such as fixed income, mixed, and credit hedge funds. Money market funds were the only investment fund type to grow in 2022,” it noted.

Alongside the decline in assets, the FSB said that most of the shadow banks’ vulnerability metrics — such as measures of leverage, credit intermediation, and maturity transformation — remained stable last year.

“Metrics for maturity transformation in fixed income funds were high overall, while metrics for liquidity transformation were also high across most funds,” it said.