Editorial: Shadow-banking interest alert

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More light needs to be shed on the shadows identified in a recent Financial Stability Board (FSB) report because they pose a growing risk to global financial stability.

The report’s data chronicles the rapid rise of companies in the non-bank sector involved in “extending credit.”

Better known as members of the “shadow banking” fraternity, they are, in FSB’s definition, non-banking loan institutions that are not “prudentially regulated.”

They might not be prudentially regulated but those institutions are reaping an increasing share of the global financial investment market.

According to the FSB report, their assets as of 2017 had grown to roughly US$51.6 trillion. In the U.S. alone, shadow-banking options hold approximately US$15 trillion in assets. The number is also significant in another major world economy: China currently accounts for 16% of shadow-banking assets. That works out to around US$8 trillion. Little wonder then that financial analysts are raising concerns about the growth of the shadow-banking sector.

For many businesses and entrepreneurs, shadow bankers offer what might appear to be attractive borrowing options, but global credit ratings agency DBRS warns that “their unravelling could exacerbate a financial crisis” – in part because they are not properly structured to “cope with a stressed environment in which market liquidity is sharply reduced and fund withdrawals are accelerating.”

In other words, they would not make great companions in a foxhole when debt bombs start exploding overhead during a steep economic downturn. Their earnings are also less diversified, which means their ability to offset hits to the bottom line is far weaker than that of traditional banks.

The fundamental concern, especially in a slowing global economy complicated by trade war fears and rising protectionism, is that they offer their business customers far less resilience to recession and far more exposure to heavy debt loads in a volatile marketplace.