Deloitte says the shadow banking system is only half as big as most observers had estimated.
Current estimates of the size of the shadow banking system range from $10 to $60 trillion. The New York Federal Reserve and the International Monetary Fund put its size in 2010 at $15 and $20 trillion respectively. But a new report by Deloitte says this important source of financing for corporates, as well as students, homebuyers and private equity barons, is only about $9.5 trillion in size.
While Deloitte’s definition of the shadow banking sector is narrower than the Fed’s – for example, it excludes non-money market mutual fund vehicles and finance companies – it contains most of the other important facets, such as securities lending and securitizations. And despite the difference in definition, the difference among the estimates is notable.
The size of the shadow banking sector is important to corporates because it provides the demand for syndicated loans and various types of asset-backed and asset-based financings crucial to many industries. With banks forced by new capital rules to rein in their balance sheets, the alternative lenders that comprise the shadow banking system could become an increasingly important source of liquidity.
Deloitte’s estimate and analysis is contained in a new report, “The Deloitte Shadow Banking Index: Shedding light on banking’s shadows.” The consulting firm set its index to 100 in 2004, while the system was robust but before all hell broke loose a year or so later. The index reached a peak of 162.5 in Q1 2008, with $20 trillion in assets. It fell to a record low of 75 in Q4 2011, when total assets hit $9.5 trillion.
It is hard to see much immediate fallout from the shadow banking system’s shrinkage. After all, the leveraged loan market has had the red carpet out for corporate borrowers for some time now. But with new global financial regulations designed to prune back or uproot many aspects of the shadow banking system coming on line in the next two years, it pays for finance executives to keep a close eye on it, and to remember to diversify their sources of leverage.