Shadow Banking May 16, 2017

Transcription

1 Global Risk Institute Shadow Banking May 16, 2017 Sheila Judd Executive in Residence

2 Presentation Purpose Share information/research findings on the topic, including GRI recommendations for industry oversight: Sheila Judd, Executive in Residence, Global Risk Institute (GRI) Provide Bank of Canada view: Toni Gravelle, Managing Director of the Financial Markets Department, Bank of Canada Guillaume Bédard-Pagé, Director, Financial Markets Department, Bank of Canada 2

3 Presentation Overview Shadow Banking Definition(s) A US$36 Trillion (and growing) Global Sector Areas to Watch The Canadian Perspective Regulatory Considerations 3

4 Main Points Shadow banks support economic growth and innovation, but their activities can pose heightened risks to the financial system, borrowers and investors Sector is large and diverse; it continues to grow and evolve Concentrations, funding mismatches and lack of transparency are key risk areas Introducing bank-like regulation to mitigate global systemic risk is complicated 4

5 What is Shadow Banking? 5

6 Shadow Banking Definitions No single definition, but all have common elements: - Non-bank financial entities that are not deposit taking institutions - Prudential banking regulation does not apply Financial Stability Board Definition: Credit intermediation involving entities and activities (fully or partly) outside of the regular banking system 6

7 Non-bank Credit Intermediation Activities Alternative lenders - Mortgage companies - Consumer loan companies - Auto lenders - Leasing companies 7

8 Non-bank Credit Intermediation Activities FinTech US based P2P lender; world s largest Consumer and business loans $26 B in cumulative loans NYSE listed Canadian lender Private (individual and corporate investors; partnerships include CIBC, Equitable Bank, Power Financial) US based lender Loans 84% US; 17% international $19 B in cumulative loans NYSE listed US based P2P lender Private equity backed $7 B in loans US based with loans in North America, Europe and Australia $3 B in loans; small business focus Private equity investors (including BNS, ING, Santander) 8

9 Non-bank Credit Intermediation Activities Alternative lenders, such as mortgage companies, consumer loan companies, auto lenders and leasing companies (Excludes pension funds and insurance companies) Credit-based investment funds, such as money market funds, mutual funds, exchange-traded funds and hedge funds (Excludes closed end funds) Securities financing (repurchase agreements and securities lending) and other broker-dealer intermediation (Excludes firms that are consolidated into regulated entities) Securitization activities 9

10 Financial Stability Board Categorization Five economic functions that can give rise to systemic risk: Economic Function EF1 EF2 EF3 EF4 EF5 Definition Management of collective investment vehicles with features that make them susceptible to runs Loan provision that is dependent on short term funding Intermediation of market activities that is dependent on short-term funding or on secured funding of client assets Facilitation of credit creation Securitisation-based credit intermediation and funding of financial entities Typical entity types Fixed income funds, mixed funds, credit hedge funds, real estate funds Finance companies, leasing companies, factoring companies, consumer credit companies Broker-dealers Credit insurance companies, financial guarantors, monolines Securitisation vehicles 10

11 Shadow Banking Has Benefits Supports economic growth + Increases credit availability + More sources of liquidity Diversifies financial system risks Fosters innovation 11

12 Shadow Banking Has Benefits and Risks Supports economic growth + Increases credit availability + More sources of liquidity Diversifies financial system risks and Risks - For consumers, investors and financial system 12

13 Risks for Borrowers and Investors More sources of credit for already stretched consumers More investment products available to investors 13

14 Systemic Risk Drivers Activities that pose systemic risk: Maturity / Liquidity Transformation Liquidity Risk Use of Leverage Solvency Risk 14

15 What is Maturity Transformation? Using short term funding for long term assets Risk is whether funding will be available through duration of asset Maturity = Short term funding for = Liquidity transformation longer term assets risk Example: Using demand deposits and/or short term GICs as source of funding for mortgages 15

16 What is Liquidity Transformation? Using liquid assets to finance less liquid assets Example: Money market funds that purchase assets with limited liquidity, but offer investors the ability to redeem their investments on short notice 16

17 Why the Difference in Regulation? Banks are subject to a social contract Banks benefit from government-backed deposit insurance and funding backstops; in exchange, banks must abide by government regulations - Prevent panics that result in runs on deposits - Protect depositors and taxpayers - Provide back-up funding source in event of - Provide stability to the financial market disruption system Shadow banks are not subject to the same social contract: they exist outside of the realm of banking regulation that protects depositors and taxpayers 17

18 Why is Shadow Banking a Concern? Shadow banks operate like banks, with liquidity and solvency risks Despite the significant financial reforms post the financial crisis, shadow banks are not subject to liquidity, leverage or capital rules that apply to banks Most observers agree that shadow banking activities caused the financial crisis Failure in shadow banking could pose risks for financial stability 18

19 International Monetary Fund Assessment Future risk levels will be influenced by, among other things, the degree to which liquidity mismatches deepen thereby increasing run risks, the extent to which entities use leverage, the extent to which concentrations increase, and whether the level of transparency of risk improves allowing for investors to assess risks properly. International Monetary Fund Global Financial Stability Report, October

20 Shadow Banking Size and Trends Shadow Banking Banking US$36 T (end of 2014) US$135 T Up 10.1% year over year Average growth of 6.3% from Up 6.4% year over year Average growth of 5.6% from About ¼ the size of banking; growing faster Source: FSB s Global Shadow Banking Monitoring Report, November

21 Primary Drivers of Shadow Banking Growth Regulation - Tighter rules and more constraints for banks than non-banks Low interest rates; ample liquidity - Search for yield by investors - Search for yield by asset managers has spurred some managers to begin lending Technology - New technologies and demand for technology based solutions - New firms are not burdened by legacy technology / infrastructure - Easier to bring borrowers and investors together 21

22 Shadow Banking Around the Globe Share of Shadow Banking Assets, End of 2014 CA = Canada CN = China DE = Germany EMEs ex CN = Argentina, Brazil, Chile, India, Indonesia, Mexico, Russia, Turkey, Saudi Arabia, South Africa FR = France IE = Ireland JP = Japan KR = Korea NL = Netherlands UK = United Kingdom US = United States Source: FSB s Global Shadow Banking Monitoring Report, November

23 Shadow Banking Around the Globe (2015) Share of Shadow Banking Assets, End of 2015, excluding China CA = Canada DE = Germany EMEs = Argentina, Brazil, Chile, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, Turkey FR = France IE = Ireland IT = Italy KY = Cayman Islands JP = Japan KR = Korea NL = Netherlands UK = United Kingdom US = United States Source: FSB s Global Shadow Banking Monitoring Report, May

24 Largest Shadow Banking Sectors Shadow Banking Percentage of GDP, Top 10, End of 2014 % of GDP Ireland 1,190 United Kingdom 147 Switzerland 90 United States 82 Netherlands 74 Germany 73 France 71 Japan 60 Canada 58 Korea 48 Source: FSB s Global Shadow Banking Monitoring Report, November 2015, Supplemental Data File 24

25 Growth of Largest Shadow Banking Sectors Shadow Banking Growth vs. GDP Growth, , % SB Growth GDP Growth Ireland United Kingdom Switzerland United States Netherlands Germany France Japan Canada Korea Source: FSB s Global Shadow Banking Monitoring Report, May 2017, Supplemental Data File 25

26 Areas to Watch for Heightened Systemic Risks Countries with the largest share of global shadow banking assets that also have large shadow banking sectors relative to their economy Countries experiencing significant growth in shadow banking Largest Contributors to Systemic Risk Share of Global Shadow Banking Assets Country 2014 Rank Change from 2010 Relative Size of Shadow Banking Sector to GDP SB Assets Rank as % of GDP USA 40% 1 Down 2% 82 4 UK 11% 2 Down 23% China 8% 3 Up 400% Ireland 8% 4 Up 14% 1,

27 Shadow Banking Activities - Breakdown Funds Securitization Funds Credit Insurers Funds Non-bank Lenders Credit Insurers Brokerdealers Securitization Broker-dealers Non-bank Lenders 27

28 Canadian Perspective Sector size: $1.1 Trillion - About half the size of Canada s traditional banking sector - 2.9% of global total shadow banking sector Source: Bank of Canada Financial Stability Report December

29 Bank of Canada Stability Risk Assessment Based on available information we judge that the shadow banking sector does not pose large vulnerabilities for the Canadian financial system at this time, mainly because of the limited degree of liquidity and maturity mismatch as well as the low leverage in most parts of the sector. The relatively small size of individual sub-sectors currently also limits the potential for systemic stress. Bank of Canada, Financial System Review, December

30 Canada s Evolving Mortgage Market Growing non-bank segment - Mortgage finance companies (MFCs) - Mortgage investment corporations (MICs) - Private investors MFCs are non-bank financial institutions that underwrite and administer mortgages sourced through brokers - Funding mainly through securitization or direct sales to third parties, primarily Canada s Big Six banks - Not directly subject to prudential banking regulation, but access to mortgage insurance and securitization requires adherence to OSFI mortgage rules MICs and other private investors typically deal in uninsured mortgages that are not available through traditional channels - Non-prime loans, second mortgages, very short-term mortgages - Investors in MICs take on greater risk and receive higher returns 30

31 Growth in Mortgage Finance Companies 12.5% market share (end 2015); up from 6.6% at end of main MFCs; other smaller players as well Growth driven by: - Demand - Increased availability of mortgage insurance and access to securitization (in turn due to policies to promote competition) - IT advances (web-based platforms, extensive automation of processes) - Greater internet use by borrowers looking to compare mortgage products and rates 31

32 MFCs and Systemic Risk MFCs are contributing to an increase in financial system vulnerabilities - Riskier assets - Lower levels of capital and contingent liquidity - More concentrated funding sources If a large MFC were to fail or become unable to fund new loans, it would be disruptive for the mortgage market, possibly magnifying the impact of a downturn. Bank of Canada, December 2016 Financial System Review 32

33 Regulation A myriad of banking regulations has been implemented post the financial crisis; riskiest activities of shadow banking have been addressed Specific to shadow banking, the Financial Stability Board: - Implemented sector monitoring in 2010 that has increased reporting and facilitated improved understanding of sector activities and risks - Implemented a Policy Framework in 2013, with guiding principles and an implementation toolkit for national regulators 33

34 FSB Policy Framework (August 2013) Regulatory measures should be: - Focused, targeting the externalities and risks that shadow banking creates - Proportionate to the risks to the financial system - Forward looking and adaptable to emerging risks and innovations - Designed and implemented in an effective manner, balancing the need for international consistency against the need to take account of jurisdictional differences - Regularly assessed and reviewed following implementation and improved as necessary May 2016 Implementation Assessment: still at early stages 34

35 Regulatory Challenges Lack of consistency in how nations define and measure shadow banking Difficulties in obtaining robust reporting Differences in breadth and scale of activities (and risks being taken) across jurisdictions Continuing evolution of the sector Positive contributions of shadow banking activities: - Fills in gaps in traditional bank offerings - Driver of innovation - Diversifies financial system risks across more players 35

36 Regulatory Considerations Are guiding principles enough? Should shadow banks be subject to banking regulation? What controls could be implemented to mitigate risks associated with unchecked growth and innovation? 36

37 GRI Recommendations Systemic risks: - National regulators should introduce a minimum liquidity requirement for systemically important shadow banks Risk transparency: - Regulators should require simple and transparent risk disclosures for borrowers and investors 37

38 Main Points - Recap Shadow banks support economic growth and innovation, but their activities can pose heightened risks to the financial system, borrowers and investors Sector is large and diverse; it continues to grow and evolve Concentrations, funding mismatches and lack of transparency are key risk areas Introducing bank-like regulation to mitigate global systemic risk is complicated 38