Huw Jones - Better data is needed to spot risks from "shadow banks" stepping up credit to heavily indebted companies, an annual survey of the non-banking financial system said on Monday.
The Financial Stability Board (FSB), a body of regulators that coordinate financial rules for the Group of 20 Economies (G20), said leveraged loans warranted closer attention given the potential for spillovers into other markets if something went wrong.
"Given these developments ... it is important to consider enhancing data/information collection so as to have clearer view of the market and its risks," the FSB said in its Non-Bank Financial Intermediation report for 2017.
Non-bank or "shadow bank" finance refers to credit generated outside banks, such as by collective investment vehicles, broker-dealers and funds that invest in bonds and money markets.
Shadow banking, with its pejorative connotations, is a term the FSB no longer uses as it seeks to emphasise how the sector can provide valuable credit to the economy as banks rein in risk-taking to cut down on how much expensive capital they must hold.
The FSB said its "narrow" measure of shadow banking grew by 8.5% to US$51.6 trillion in 2017, or 14% of total global financial assets.
Since 2011, just four countries, China, the Cayman Islands, Ireland and Luxembourg, have accounted for over two-thirds of the US dollar value increase, the FSB said.
The report said non-banks are playing a growing role in the US$1.4 trillion to US$2.4 trillion market for leveraged loans to companies that have high levels of debt and a credit rating below investment grade.
About two-thirds of collateralised loan obligations (CLOs) that repackage the loans are held by non-bank investors, including pension funds, insurers and investment funds, the FSB said.
Regulators are sometimes unable to see who is ultimately exposed to leverage loan debt piles that have grown rapidly and now exceed pre-crisis highs, and whether they could absorb shocks as some don't have substantial capital buffers like banks.
Earlier this month, Bank of England governor Mark Carney likened leveraged loans to subprime mortgages that defaulted a decade ago in the United States to trigger the global financial crisis.
The FSB said its broad measure of shadow banking, which includes pension funds and insurers, grew by 7.6% to US$116.6 trillion in 2017, a record 30.5% of global financial assets.
The FSB also said financial technology, or fintech, businesses were a growing feature in shadow banking, extending about US$284 billion in credit in 2016, but data was too poor to get a full picture. – Nampa/Reuters