Although banks' credit profiles have improved since the global financial crisis, systemic risk has not been reduced, according to a report by Fitch Ratings.
In Fitch's report, "Shadow Banking Implications for Financial Stability," banks have enjoyed "increased capital and liquidity and implemented more conservative underwriting standards" since the crisis. However, bank regulation, low interest rates, a favorable economic backdrop and the growth of financial technology have led to a rise in "shadow banking," or credit intermediation occurring outside of banks or other institutions.
The rise of shadow banking could be a sign of growing systemic risks, such as direct and indirect exposures faced by banks, insurance companies and pension funds, reduced financing availability for banks and non-financial corporate borrowers, and increased asset price volatility.
That said, Fitch believes credit intermediation outside of the banking industry, assuming a level of transparency, can be positive if it provides additional sources of credit and liquidity to support economic growth.
Shadow banking accounted for $52 trillion in global assets, or 13.6% of all assets, as of Dec. 31, 2017, up 73.3% from Dec. 31, 2010, according to the Financial Stability Board. The U.S. had the largest share of shadow banking assets at $14.9 trillion, 28.7%, of all assets. This was down from 48% as of Dec. 31, 2010.
Shadow banking growth is attracting increased country-specific and international regulatory scrutiny, but improvement has been incremental, the Fitch report said. A more comprehensive regulatory framework most likely won't exist beyond specific countries or subsectors unless a marketwide shock connected to shadow banking requires it.
The systemic risk linked to shadow banking could be mitigated via direct regulation, more transparent financial reporting and limitations on asset/liability mismatches, Fitch said. But regulators would need to balance such changes against the need for sensible expansion of capital and credit availability, particularly for developing economies.