* G20 group charts rise of sector blamed for aggravating
* Shadow banking jumps in a decade from $26 trillion in 2002
* Policymakers eye curbs on 'alphabet soup' of non-bank
By John O'Donnell
BRUSSELS, Nov 18 The system of so-called "shadow
banking," blamed by some for aggravating the global financial
crisis, grew to a new high of $67 trillion globally last year, a
top regulatory group said, calling for tighter control of the
A report by the Financial Stability Board (FSB) on Sunday
appeared to confirm fears among policymakers that shadow banking
is set to thrive, beyond the reach of a regulatory net
tightening around traditional banks and banking activities.
The FSB, a task force from the world's top 20 economies,
also called for greater regulatory control of shadow banking.
"The FSB is of the view that the authorities' approach to
shadow banking has to be a targeted one," the group wrote in a
report, noting the current lax regulation of the sector.
"The objective is to ensure that shadow banking is subject
to appropriate oversight and regulation to address bank-like
risks to financial stability," it said.
Officials at the European Commission in Brussels also see
closer oversight of the sector as important in preventing a
repeat of the financial crisis that has toppled banks over the
past five years and rocked the euro zone.
The study by the FSB said shadow banking around the world
more than doubled to $62 trillion in the five years to 2007
before the crisis struck.
But the size of the total system had grown to $67 trillion
in 2011 - more than the total economic output of all the
countries in the study.
The multitrillion-dollar activities of hedge funds and
private equity companies are often cited as examples of shadow
But the term also covers investment funds, money market
funds and even cash-rich firms that lend government bonds to
banks, which in turn use them as security when taking credit
from the European Central Bank.
Even the man credited with coining the term, former
investment executive Paul McCulley, gave a catch-all definition,
saying he understood shadow banking to mean "the whole alphabet
soup of levered up non-bank investment conduits, vehicles and
structures," such as the special investment vehicles that many
blamed for the financial crisis.
The United States had the largest shadow banking system,
said the FSB, with assets of $23 trillion in 2011, followed by
the euro area - with $22 trillion - and the United Kingdom - at
The U.S. share of the global shadow banking system has
declined in recent years, the FSB said, while the shares of the
United Kingdom and the euro area have increased.
The FSB warned that tighter rules that force banks to hoard
more capital reserves to cover losses could bolster shadow
It advocated better controls, although cautions that shadow
banking reforms should be dealt with carefully because the
sector can also be a source of credit for business and
Forms of shadow banking can include securitization, which
can transform bank loans into a tradeable instrument that can
then be used to refinance credit, making it easier to lend.
In the run-up to the crisis, however, banks such as
Germany's IKB stored billions of euros of such instruments in
off-balance sheet vehicles, which later unraveled.
Another example is a repurchasing agreement, or repo, where
a player such as a hedge fund could sell government bonds it
owns to a bank, agreeing to repurchase them later.
The bank may then lend those bonds onto another hedge fund,
taking a position on the government debt. Such agreements are
used by banks to lend and borrow. A risk could arise if one of
the parties in the chain collapses.
The European Commission is expected to propose EU-wide rules
for shadow banking next year.