Shadow banks: a latent risk to global financial stability

Shadow banks, non-bank financial entities that operate outside the traditional banking system, have experienced worrying growth in recent years.

Its expansion raises significant risks for global financial stability, such as credit losses and liquidity mismatches.

These institutions offer similar services to traditional banks, such as lending and asset management, but without the same level of regulatory oversight. The Financial Stability Board (FSB) notes that in 2021, non-banks accounted for around $239 billion in assets, roughly half of the world's total financial assets.

"Shadow banks" may face problems if their corporate borrowers default, especially in a weak economic environment. Also, some open ended funds, a type of non-bank entity, could experience liquidity difficulties if investors decide to withdraw their money quickly, as they may not be able to sell their assets at the same rate.

The lack of access to emergency financing by central banks and the limited tools of public authorities to mitigate contagion risks also raise concerns. Contagion risk could spread to traditional banks through real and perceived connections, potentially triggering a broader financial crisis.

Given this situation, the regulation of non-banking entities is becoming increasingly relevant. The Bank of England recently announced a resilience test of the UK financial system that will include non-banks. In addition, financial watchdogs in the United States and Europe are considering the implementation of the swing pricing, a mechanism that would impose a cost on the withdrawal of cash from certain funds to prevent dilution of the value of other investors' holdings and discourage massive withdrawals of assets.

The International Monetary Fund (IMF) has called for stricter supervision of nonbanks, including rules on their capital reserves and access to liquidity, to ensure global financial stability.