Banks' exposure to shadow banking entities up in India, others

Assets of non-bank financial intermediaries grew by $5 trillion in 2012 to reach $71 trillion

India is among the nations which have witnessed a marked increase in the exposure of its banks to 'shadow banking' entities, whose asset base globally grew to $71 trillion in 2012-end, according to an international body of financial regulators.

Shadow banking system refers to credit intermediation involving entities and activities outside the purview of the regular banking system.

However, the recent financial crisis demonstrated the capacity for some non-bank entities and transactions to operate on a large scale in ways that create bank-like risks to financial stability.

“The assets of non-bank financial intermediaries (excluding those of insurance companies, pension funds and public financial institutions) grew by $5 trillion in 2012 to reach $71 trillion,” said the report by Switzerland-based Financial Stability Board (FSB).

For a number of emerging market economies, non-bank financial intermediation remained relatively small compared to the level of GDP, the report added.

In India, Turkey, Indonesia, Argentina, Russia and Saudi Arabia the amount of non-bank financial activity remained below 20 per cent of their GDP at the end of 2012.

Moreover, in terms of credit risk for banks, Brazil, Indonesia, India and Saudi Arabia all experienced marked increases in the exposure of their banking system to shadow banking entities, albeit from a low base, FSB added.

The funding risk for banks or the extent that banks are reliant of shadow banking entities for funding also showed the greatest increase in Indonesia, India and Saudi Arabia. The third annual global shadow banking monitoring report covered 25 jurisdictions and the euro area as a whole.     

“Improving bank regulation is not enough to fully address the weaknesses of the financial system revealed by the crisis. The shadow banking system continues to transform and innovate,” said FSB Standing Committee on Assessment of Vulnerabilities Chairman Agustín Carstens.