The so-called “shadow” banking sector continues to grow at twice the rate of the traditional bank industry — highlighting the rise of potential systemic risks — according to new data from the Financial Stability Board (FSB).
In a new report, the FSB said that non-bank financial institutions (including investment funds, hedge funds and pension funds) grew by 9.4% in 2024, which was double the pace of the banking sector (4.7%). That gave shadow banks a 51% share of total global financial assets and US$256.8 trillion in total assets.
“This growth reflected buoyant risk appetite amidst increasing asset prices and lower policy rates,” the FSB said.
While all types of non-banks generated growth in 2024, the sub-group that includes money market funds, hedge funds, other investment funds, trust companies and structured finance vehicles, was the fastest growing segment, it noted — with their assets growing by 11% to US$169.4 trillion. That outpaced the growth in pension fund and insurer assets, at 7% and 6%, respectively.
The FSB also said that its narrow measure of the sector — which only includes entities that engage in credit intermediation activities that may pose financial stability risks due to their potential susceptibility to runs on their assets — increased by 12% to US$76.3 trillion, boosting their share of total financial assets to 15.4% from 14.5% in 2023.
While most of the systemic risk indicators — such as measures of leverage, credit intermediation, and liquidity transformation — remain relatively stable, the report noted that the fixed-income funds “showed high degrees of liquidity transformation,” and broker-dealers, structured finance vehicles and finance companies had “high levels of leverage.”
“Vulnerabilities related to leverage, maturity and liquidity mismatches can amplify shocks in the financial system, such as sudden corrections in asset prices or bouts of financial market volatility,” the report noted.
Shadow banks also increased their borrowings at a faster pace than banks, with their borrowing growing by 6.9%, compared to 4.3% for banks. Broker-dealers and captive financial institutions led the way with total borrowings of US$6.6 trillion and US$6.2 trillion, respectively.
Finally, the report noted that there are “severe limitations” in the availability of data on private credit.
“The assessment of private assets’ potential impact on financial stability will be an important part of the overall FSB’s surveillance work in the year ahead,” it said.
The FSB began more actively monitoring the shadow banking sector in the wake of the global financial crisis, which revealed that regulators lacked the ability to detect the build-up of systemic risks outside of the traditional financial industry.