Regulators Concerned About Risks in $75 Trillion Shadow Banking Sector

Authorities are nowhere near to fully understanding “shadow banking” as the $75 trillion sector morphs and grows under the influence of new technology and regulation, a top markets supervisor said on Wednesday.

Shadow banking refers to the supply of credit outside traditional banks, such as from private equity investors, money market funds, insurers, repurchase agreements and securities lending.

The group of 20 economies (G20) agreed during the 2007-09 financial crisis that the opaque sector should be better supervised, fearing that as traditional banks become more regulated, risky lending activities would migrate there. But progress has been slow.

“After 10 years of being a hot topic there isn’t a consensus yet,” Ashley Alder, chief executive of Hong Kong’s Securities and Futures Commission, told a CityWeek conference in London.

“Is it banking or is it part of market-based finance? What are we going to do about it? We are nowhere near the finishing line,” he said.

So far, regulators have limited themselves to tighter supervision of the sector and rules which make it more expensive for hedge funds and insurance companies to raise funds from loaning shares from the end of 2017.

But shadow banking continues to grow, as credit from traditional banks has shrunk in the face of tougher rules on lending quality and capital requirements. The sector reached $75 trillion in 2013, up $5 trillion on the year before, according to G20 figures.

Part of the problem is that today’s shadow banking sector is not the same as it was back during the crisis, Alder said.

New players such as asset managers have become lenders, as they hunt for yield in a low interest rate environment.

Advances in technology – which mean there are far more ways of linking credit with borrowers, such as the use of mobile phones in Africa – have also created a new set of financial actors in what Alder dubs “modern” shadow banking.

He cited other developments such as Chinese e-commerce giant Alibaba teaming up with Lending Club to offer peer-to-peer lending for U.S. customers.

The sector is also filling the credit void left by banks, particularly in financing small companies, thereby fitting in with the G20’s emphasis on economic growth, Alder said, meaning regulators are wary of introducing a slew of new rules in case they choke off funding.

There was disagreement among regulators over what should be done, Alder said. “We need to properly identify what we are talking about. What do we do about big asset managers who have invested in credit markets?” he added.

“We actually have a much bigger challenge on our hands now than we had in 2008.” (Editing by Pravin Char)