Garett Jones  

Shadow Banking: Probably Bigger than you Thought

Business Accountability: Good ... Would the Private Sector Make ...
Bloomberg's Moshinsky and Brunsden report

The shadow banking industry has grown to about $67 trillion, $6 trillion bigger than previously thought...The [Financial Stability Board, FSB], a global financial policy group comprised of regulators and central bankers, found that shadow banking grew by $41 trillion between 2002 and 2011. 

Full report (PDF) here. For comparison, U.S. M2, a broad measure of the money supply, is about $10 trillion.  Shadow banking is big. 

Shadow banking, in the FSB's usage, is made up of financial services that use short term savings to fund long term investments (maturity transformation), that fund illiquid investments with liquid funds (liquidity transformation), and/or that make heavy use of leverage (I'm skipping a fourth function for brevity). 

Borrow short and liquid, lend long and illiquid, and only have thin slice of equity on top: That's modern banking, whether shadow or daylight.  

Don't sweat the precise number of $67 trillion too much. Measuring shadow banking is hard: routine accounts payable are a kind of shadow banking.  But it still sounds like it's bigger than it used to be.    

All that extra banking activity over the last decade, all that extra private-sector credit creation, and still so little price inflation.  Worth genuinely reflecting upon. 

And in "hot money" news: 

The share of [shadow banking] activity based in the U.S. has declined from 44 percent in 2005 to 35 percent in 2011, moving to the U.K. and the rest of Europe.

I wouldn't lament the decline.  Let's spread the risk.  

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CATEGORIES: Finance , Monetary Policy

COMMENTS (1 to date)
John Brennan writes:

It's interesting that you make an assessment of a change that you admit is hard to measure. What if the measurement is 10% off? 25%? You probably shouldn't put forth definitive judgements on hard to judge data.

If we agree that the figure is still large, and that the financial crisis was caused in part by a collapse in trust in the shadow banking sector, what can we conclude? Bailouts prove that the government will always compensate failed risk? That there is no hazard in moral hazard?

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