Shining light on shadow banking

As the shadow banking sector looks set to overtake its regulated counterpart, experts explain the growing risks, the way that regulators are likely to react and how compliance officers should respond. Neasa MacErlean reports.

What is shadow banking?

It is that loosely regulated, high-yieldlending part of the world’s banking sector that is now nearly the same size as the formal banking industry. The two parts combined were valued at US$382 trillion by the Financial Stability Board at 31 December 2017. The formal part accounts for 52 per cent of the total, and the informal, shadow part has reached 48 per cent, according to the 2018 FSB annual report (Global Monitoring Report on Non-Bank Financial Intermediation). [1] The report measures 80 per cent of the world’s economy. Shadow banking is growing at twice the rate of the formal sector (7 per cent compared to 3.6 per cent) and, at this level of progress, would become the larger segment in 2020, according to Compliance Monitor’s calculations.