The shadow banking system in the United States might not be as large today as regulators and market participants feared, according to a new quarterly index introduced today by the Deloitte Center for Financial Services. However, with regulatory changes and financial innovation looming, the shadow banking system could creep back very quickly, the Deloitte research group cautions.
The Deloitte Shadow Banking Index shows the volatile shadow banking system totaled $9.53 trillion at the end of 2011 ‒ more than 50 percent below its peak in 2008 ‒ and a figure considerably lower than many estimates.
“With other size estimates ranging from $10 to $60 trillion, we think shadow banking is a concept continuing to look for a better definition,” said Adam Schneider, the executive director of the Deloitte Center for Financial Services.
The Deloitte Shadow Banking Index value differs from other market estimates. For instance, Deloitte estimates that shadow banking assets were over $10 trillion in 2010, compared to the $24 trillion estimated by the FSB.
The FSB estimate differs greatly from Deloitte’s estimates. Most importantly, the FSB’s use of “other financial intermediaries” as a proxy for shadow banking includes activities that are not contained in Deloitte’s definition, including non-MMMF investment funds, finance companies, and “others.”
Other estimates vary as well. For example, researchers at the Federal Reserve Bank of New York (Pozsar, et al.), puts the size of the U.S. shadow banking system at $20 trillion in 2008 and $15 trillion in 2010. Similarly researchers at the International Monetary Fund (IMF) opined that the shadow banking liabilities in the U.S. were as high as $18 trillion in 2010.
Key Index findings include:
- Shadow banking in the U.S. reached a peak value of $20.73 trillion in the first quarter of 2008.
- Also during the first quarter of 2008 the traditional banking sector’s assets were only about $15 trillion — 28 percent less than shadow banking.
- At the end of 2011, however, the comparison reversed with assets in the traditional banking sector $8 trillion higher than shadow banking.
- Dramatic growth of the sector occurred between late 2004 (the Index’s starting point) and early 2008, increasing nearly two-thirds in size.
- There have been dramatic changes to a number of the Index’s components, including money market mutual funds and activities relating to the government-sponsored enterprises. Securities lending is the only activity that is twice the volume today compared to the Index’s baseline eight years ago.