The IMF has warned that risks posed by “shadow banks” are spreading to traditional lenders and raising the risk of a banking crisis. The Washington-based institution warned there are growing dangers posed by the $3tn world of private credit, which has boomed in recent years against a backdrop of record low interest rates.
It warned non-bank lenders such as investment funds, pension funds and insurers have become so embedded in the financial system that problems could quickly cascade down to traditional lenders. Shadow banks are not bound by the same regulations as traditional lenders which take deposits and are subject to capital requirements. This has helped the non-bank sector to thrive in recent years.
“The exponential growth of private credit has raised concerns that credit provision is migrating from heavily regulated banks and relatively transparent public markets to the comparatively lightly regulated and opaque private credit industry,” the IMF said.
“The emerging financial system, however, is marked by intertwined operations whereby traditional institutions like banks and insurers, as well as alternative nonbank like private credit funds, are not substitutive entities but instead part of an increasingly integrated system.”
It said banks’ exposures to shadow lenders now represented roughly 9pc of their total loan portfolios in the US and Europe, leaving them vulnerable to trillions of dollars in loans and credit lines. Some of this money is also lent directly to households and businesses, raising the risk of wider economic damage in the event of a financial crisis.
The IMF highlighted that in a “stress scenario” in which non-banks are forced to fully draw down their credit lines from banks, roughly 10pc of US banks and 30pc of European banks (by assets) would see their regulatory capital ratios fall by more than a percentage point.
“In other words, bank losses and capital declines increase sharply alongside stress among non-banks, demonstrating that vulnerabilities in the nonbank sector are interconnected—they can quickly transmit to the core banking system, amplifying shocks and complicating crisis management,” it said.
