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Abu Dhabi, UAESunday 16 December 2018

Shadow lenders from China could pose a $7tn risk to financial stability

Financial Stability Board says Chinese shadow lenders account for about 15% of the world’s riskier non-bank loans

Mark Carney, governor of the Bank of England and chairman of Financial Stability Board. Chris Ratcliffe / Bloomberg
Mark Carney, governor of the Bank of England and chairman of Financial Stability Board. Chris Ratcliffe / Bloomberg

Chinese shadow lenders account for about 15 per cent of the world’s riskier non-bank loans, according to a regulator’s report.

The Chinese companies accounted for $7 trillion of $45.2tn in global shadow-banking assets tied to the supply of credit that could pose systemic risks, the Financial Stability Board said in a report on Monday. China and Luxembourg provided data for the measurement for the first time.

Global regulators are bolstering oversight of shadow banking after the 2008 credit crisis, when the activities of businesses outside the traditional banking system allowed borrowings and excessive risk-taking to build up. This went largely unchecked by authorities, threatening the stability of the entire financial system.

“Market-based finance provides increasingly critical alternatives to bank lending in the financing of economic growth, and it is vital that resilience of the sector is maintained as it continues to evolve,” FSB chairman Mark Carney said in a statement.

The FSB makes a broad estimate of the size of financial industries in the 29 countries it covers, then narrows this down to focus on the activities of non-bank credit intermediaries that may pose risks to financial stability. This “narrow measure” accounts for 13 per cent of total financial-system assets in these jurisdictions.

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The FSB said investment vehicles that may be vulnerable to runs, such as open-ended fixed-income funds, credit hedge funds and money market funds, grew by 11 per cent in 2016 and 13 per cent on average over the past five years. Other trends identified in the report include: broker-dealers in some jurisdictions using significant leverage,” although they’re still less levered than before the crisis.

It said growth of collective investment vehicles has been accompanied by a “relatively higher degree of credit investment” and “some liquidity and maturity transformation” while "in some jurisdictions, finance companies tend to have relatively high leverage and maturity transformation, which increases their susceptibility to roll-over risk during periods of market stress”.

“Given the evolving nature of shadow banking into new forms and across borders, the FSB continues to work on further improvements to data availability and risk analysis so that new sources of systemic risk can be identified in a forward-looking manner,” said Klaas Knot, head of the Dutch central bank and chairman of the FSB Standing Committee on Assessment of Vulnerabilities.